On track to meet full-year forecast: 3QFY09 net profit rose 18% y/y to S$63MM, an improvement from 2Q’s 1% decline. This was largely driven by a stronger top line, lower staff costs and the rebound in the US$, which pushed up translated JV & associate profits. 9M net profit of S$195MM (down 2% y/y) amounts to 78% of our above-consensus forecast – SIA Eng should have little problem meeting expectations of flat y/y profits for the full year. However, earnings looks set to weaken in FY10E as the industry downturn and SIA’s (c.41% of its business) recent decision to trim flights will impact workload. Global MRO rates will come under increasing pressure as more hangar capacity becomes available. The Singapore Budget initiatives should boost annualized EPS by c.2% but not completely offset this pain.

Growth bumped up by low base last year: Revenue grew 9% y/y in 3QFY09, an improvement from 2Q’s 5% growth, and was driven by higher line maintenance revenue with the increased number of flights handled (we estimate +4% y/y), more fleet management jobs and continued work on the B747-400 turnkey project. 3Q’s strong growth was also attributed to the low base last year as SIA Eng paid a c.S$7.6MM special staff bonus to commemorate SIA’s 60th anniversary. Excluding this, EBIT would have risen 10% y/y instead of the reported +54% and net profit would have increased by c.5% y/y instead of the reported +18%. EBIT margin was 11%, similar to ytd levels, up 3ppts y/y.

Profits from JVs & associates back on the growth path: Profits rose 10% y/y in 3QFY09 (versus a 6% decline in 2Q and no growth in 1HFY09), helped by the 2% y/y rebound in the US dollar. Net of FX effects, we estimate that associates’ profit growth remained stable at c.8% y/y while JV profit growth decelerated to c.6% y/y from c.8% in 2Q. These profits constituted 57% of Group PBT from 62% in the prior year. They continued to provide a healthy inflow of dividends, up 17% y/y in 9MFY09 with a payout ratio of 62%, up from 54% in the prior year. Even if these dividends halve next year, they should sufficiently fund SIA Eng’s maintenance capex and will likely sustain the Group’s positive FCF position unless its core business turns loss-making, which we view as unlikely given its sizeable variable cost component.

Strong cash position maintained: SIA Eng remained largely debt-free with net cash of S$269MM (S$0.25/share) at Dec 2008. Cash balance should continue to rise despite the downturn as we expect SIA Eng to remain FCF positive even if profits halve. SIA Eng has been FCF positive for the past 13 years (since our financial records began), even during previous crises.

Share price likely to stay range-bound near term: Though SIA Eng’s workload has not been hurt much by the current aviation downturn so far, we think its share price has already largely priced in the prospective decline in earnings (when this lagged impact should start to kick in from FY10). We also expect share price to rebound with the airlines ahead of its own earnings recovery, as has happened during previous crises. Although we could see significant upside to our DCF-based fair value of S$3.50, the low liquidity may deter investors from buying into this name. We believe that its falling trading turnover could possibly prompt SIA to revisit the issue of its free float either via a further divestment, privatization, and/or if M&A opportunities were to arise.