In line. 1Q10 net profit of S$40.4m (+17.1% yoy) was in line with our expectations, forming 22% of our FY10 forecast and 23% of consensus. The results were boosted by the consolidation of SFI, benefits from the government’s Jobs Credit scheme, and higher contributions from overseas associates.

Revenue jumped 44% yoy to S$352m on the consolidation of SFI, which contributed S$132.9m, more than offsetting a 12% decline in aviation revenue. SFI’s revenue dropped almost 20% yoy due primarily to a weak ₤. SFI’s operating margin, however, rose to 8% from 5%. Overall operating margins slipped to 12.4% from 15.7% due partly to SFI’s slimmer margins vs. the aviation-related sector, in spite of a S$6.1m boost from the Jobs Credit scheme. Net margins dropped to 11.5% from 14.1% despite a S$4.7m jump in associate profits to S$9.1m.

Aviation outlook remains soft. Management cautioned against expecting a strong recovery in the aviation sector despite signs of stabilisation. While SATS has announced some new service contract wins, their impact is likely to be insignificant.

FY10-12 EPS estimates trimmed, as we adjust for lower interest, higher capital expenditure and higher associate earnings assumptions. FY10 capex is expected to be S$60m-70m, higher than prior years, due to the consolidation of SFI and the building of a perishables handling centre.

Maintain Underperform and target price of S$1.37. We continue to expect a weak aviation industry in FY10. At 1.7x P/BV, SATS is trading at a significant premium to the peer average of 0.9x, while forecast yield of 4.4% is unattractive. Our target price is unchanged at S$1.37, still based on 1x P/BV. Maintain Underperform.