Line maintenance was the biggest contributor to operating profit- Management provided segmental breakdown on 3 key business units. Of the 3 units, Line maintenance accounted 68% of operating profit. Linemaintenance is handled out of Singapore, Australia ( 6 cities), Phillipines ( 3 major international airports and 17 domestic airports) and will soon involve one out of Los Angeles. Line maintenance, is generally performed away from hangars and this has now evolved to include segmental "C" checks for newer narrow bodied aircraft. While previously some of these C checks would involve aircraft being grounded for 5 days, it is now possible to space out such checks for select aircraft over a longer period, involving shorter duration checks. This has led to the division recording an operating profit growth of 80% on a margin of 20%.

Fleet management is another growth area, but margins are lacklustre- Fleet management is one stop comprehensive maintenance program that is based on fleet utilisation( typically in number of hours). Airlines, which outsource MRO work pay a fixed dollar based per hour utilised. This favours airlines, which would be able to budget MRO costs to utilisation. For SIAEC, this has been a growing segement and something which is targetting aggressively. However, margins can be quite unpredictable and in FY09, operating profit from this segment fell 60% on margins of 3.6%.

Outlook remains challenging- Management has guided that outlook remains weak and will deteriorate further. They have also indicated that their 23 jv and associate businesses are also beginning to see impacted by airlines grounding aircraft. Underscoring the seriousness of this, management has cut final dividend payout by 31% to 11cents. The company has indicated that capex is likely to remain steady. As such, we interpret the lowered dividend payout as an indication of the maximum potential decline in operating cash flow for FY10. Note, that final dividend payout will impact FY10's cash flow. A positive catalyst for the stock would improved traffic trends from parent SIA, which could potentially lead to SIA removing part of 17 aircraft from storage. We have downgraded our rating on the stock from a Buy to Hold. Target/Fair price remains unchanged at S$2.45.