To cushion the impact of the sharp profit decline to only $42 mln in Q4 ended Mar’09 from $340 mln quarterly average for the first 9 months of the fiscal year, and $527.5 mln a year ago, SIA has proposed distribution of its entire 80.61% stake in SATS (870 mln shares) to its shareholders on the basis of 0.73 SATS share for every SIA share. With SATS last at $1.55, that works out to $1.13 distribution per SIA share, in addition to the final cash dividend of 20 cents per share, which is a quarter of the 80 cents paid last year.

SIA said the distribution is to enable it to concentrate on airline and aircraft maintenance, repair and overhaul (MRO) businesses (ie SIA’s 81% stake in SIA Engineering stays), while allowing SATS to lessen its dependence on the aviation business.

Based on $1061.5 mln profit for the year ended Mar’09, SIA’s historic PE is 13x. One of the reasons for the sharp profit decline in the fiscal year was the fuel hedging loss amounting to $543 mln.

The divestment of SATS by SIA came as a surprise, given management’s long-standing resistance to the idea of divesting SATS and SIA Engineering.

The free float of SATS will increase, which is positive. Temasek, which owns 54.53% of SIA, will end up with 43.8%% of SATS, which now incorporates Sing Food, where Temasek used to own 69.68% of and which was sold to SATS last year. (And which resulted in SATS’ cash position dwindling to $137 mln at end Mar’09 from $620 mln a year ago.)

While SIA has only recently renewed the (ground handling & catering) contract with SATS for another 5 years to Sept 2014, hence providing some comfort to shareholders of SATS, there is no denying that SATS’ future after that becomes blurred because of the uncertainties surrounding the reciprocity arrangements between SIA and other airlines of the world.

Meanwhile, speculation of who’s next, will likely shift to Keppel Corp, which we believe has stuff that is of no strategic importance, eg KT&T, whose key asset is the 20% stake in M1; K1, and even Keppel Land! (We would however rule out the likelihood of SembCorp Ind divesting its stake in Semb Marine.)

Therefore while SIA’s share price is likely recover, especially after yesterday’s 52-cent or 4.3% drop ahead of the results announcement, there is no reason to chase it just for the entitlement. Besides, the distribution should put some pressure on SATS. We remain Neutral on both SIA and SATS.