Net profit was weaker than expectation. At operating level, non-staff costs actually increased by 10% in 1Q09, resulting in operating margin of just 5.0% vs 6.6% in 1Q08. More notably, contributions from JVs and associates fell 18.4% in 1Q09. This is highly significant as the bulk of earnings from this involved engine maintenance which had remained relatively resilient. This should surprise the market.

Revenue fell by just 2.4%, surprisingly mild considering that SIA had mothballed 17 aircraft, unless there was some checks prior to mothballing the aircraft. 1Q09 should also have seen some contribution from Gulf Air Contract.

The results underscore the view that MRO operations will not stage a cyclical recovery as expected by the market place. Still, the steep decline in contribution from JVs and associates (engine maintenance) is surprising and we expect the market to react negatively to the numbers.

We are maintaining our HOLD recommendation with a S$2.48 price target, which is based on mid-cycle valuation of 12x PE. We will review our earnings estimates following an analyst briefing tomorrow.