Below expectations. 1Q09 net profit of S$45m (-23% yoy) was 11% below our expectation and consensus, forming 22% of our full-year forecast. This was largely due to higher-than-expected operating expenses. JVs and associates continued to drive earnings, contributing 68% to group PBT.

Dip in sales not as bad as expected. Sales dipped 2% yoy to S$244m but exceeded our S$219m forecast, thanks to more rectification and cabin maintenance work as well as higher revenue from material usage.

But margins slipped. EBITDA margins slipped 2% pts yoy to 9%, due to higher material and subcontract costs (+12% yoy). Other operating expenses were also up by 23% yoy to S$26m because of a S$6m exchange loss from a weaker US$.

Better cash flow. Despite the drop in earnings, net cash flow improved by 52% yoy to S$60m, thanks to S$23m of dividends received from JVs and associates. Cash balance remained stable at about S$430m (-8% yoy).

Outlook challenged. We expect aviation sentiment to remain weak because of SIA’s capacity cuts, worsened by the impact of the H1N1 flu, leading to lower utilisation of SIAE’s facilities. Management guides that group performance could be affected until there is a sustained recovery in demand.

Downgrade from Outperform to Neutral; target price remains S$2.97, still based on blended CY10 P/E and DCF valuations. We keep our earnings estimates intact. SIAE’s share price has risen 39% YTD to trade at 15x CY10 P/E, in line with its peers, ST Engineering and HAECO. Given the uncertainties in the aviation sector and limited share-price upside, we downgrade it to Neutral.