FY09 performance. SIA Engineering Company (SIAEC) recently reported a 3.5% rise in FY09 revenue to S$1.05b. Better performances from Line Maintenance and Fleet Management helped offset its main Airframe and Component Overhaul business. However, Fleet Management revenue consisted of a one-off for a cabin modification job for a Middle Eastern customer.

Rates could come under pressure. While SIAEC positions itself as a premier MRO centre, it is still likely to face pressure to drop its rates. Even if it manages to sustain its rates, additional "value added services" are likely to be offered to secure contacts and these use more manpower. The group iterates that it will continue to control costs, improve productivity and redeploy manpower to new centres (e.g. Bahrain).

Stay cautious. Historically, the group has garnered >50% of its revenue from its Airframe and Component Modification business. However, the downturn is likely to result in shrinkage in business volume for this segment as more airlines cut back on flights or ground some planes. Its business from SIA will also take a hit from the aggressive capacity cut backs. Line Maintenance will also suffer with lower number of flights passing through Changi Airport. The hope for growth lies in Fleet Management, where bottomline pressured airlines seek to cut costs by sub-contracting out aircraft maintenance to a third party.

Associates/JVs were strong contributors. This segment's PBT grew 9.6% YoY to S$173m and accounted for 58% of group's FY09 PBT. The better performance was largely due to the Engine related businesses which is seeing the payoff of past investments in repairing new generation engines. However, we believe that fewer flights will crimp contributions for the next 1 - 2 years.

Good company but pricey stock. We are initiating coverage on SIAEC with a HOLD rating and a fair value estimate of S$2.95. We have used a DDM and P/E blend to factor in typical investor expectation of good yields along with an attention to earnings that also drive its share price. The stock is currently trading significantly above SARS level valuations and we are mindful that today's economy is in a more limpid and prolonged economic downturn than 2003-2004. This will lead to sustained depression of air travel and thus MRO activity. However, we are hopeful that its previous investments that went into maintaining newer generation aircraft parts and airframes will allow it some earnings buffer. We are advocating entry at about S$2.60.