** Kepler Cheuvreux initiates coverage of Italy's Avio AVI.MI with a "hold" rating and PT of €31.7 per share ($36.26), as the broker sees limited upside due to its current pricey valuation

** The French analyst cites expansion of the defence sector as the main driver of long-term growth, particularly through the project of a solid-propellant rocket engine plant in the U.S., with recovery of the aerospace sector as a supporting factor

** While it expects sustained growth, Kepler expresses caution and maintains a "hold" rating

** "The current valuation already reflects a large portion of the potential related to defence and expansion in the United States, while the risks associated with execution, product qualification, and industrial ramp-up remain significant," it notes

** Out of five analysts that cover Avio, three rate the stock "buy," and two analyst rates it "hold"

** At 910 GMT the stock is down 1.6%, compared to a flat Italian all-share index .FTITLMS

($1 = 0.8743 euros)