Wins small contract. SIA Engineering Company (SIAEC) has won a 10- year Maintenance Service Agreement with Panasonic Avionics Corporation, a leading supplier of aircraft in-flight entertainment (IFE) systems. SIAEC will maintain the eX2 IFE system which is installed on SIA's latest fleet of aircraft. The contract covers mainly line maintenance work on the eX2 IFE, including trouble-shooting, rectification and functionality checks to ensure a high level of operational reliability. We believe the earnings impact is negligible in view of the long attribution time frame and low revenue intensity as compared to its key airframe maintenance business.

SIA still critical to SIAEC's future. Although SIAEC's parent company has displayed improving operational performance in the latest month, this might be due to the summer travel spike. We believe that reinstatement of grounded aircraft might only occur in 2010 as SIA fights to contain rising fuel costs. Moreover, SIA has also rescheduled its delivery of eight A380s by 6-12 months, postponing maintenance work for SIAEC. With SIA's fleet size in status quo, we think SIAEC's airframe business activity will still be crimped. In the previous quarter, management presented a dim picture of business outlook "until there is sustained recovery of demand". We are iterating that recovery to previous year's record performance could occur only in 2012 or 2011 if demand experiences a V-shaped recovery.

Silver lining: Cost cutting. SIAEC has reached agreement with its three unions- this for staff to take half or 2 days no-pay leave in each month from July 09. To further manage the surplus personnel capacity, staff will be sent for training under government subsidised initiatives. The total savings from the no-pay leave, wage reduction and government subsidised training is expected to amount to about S$1m/month from July 09. Last quarter showed some cost management in its staff costs but we are hoping that more will be evident as it flows through past Jul 09.

Lowering fair value, Maintain HOLD. We have retained our estimates. Despite the recent run up in equities, MRO industry valuations have trended lower, signalling ill confidence in the aerospace industry. Consequently, we have lowered our PER peg to 12x (prev. 14x) and our SOTP valuation drops to S$2.76 (prev. S$2.95). We view the recent sustained price downtrend coupled with poor liquidity may stall any significant price ascension. Maintain HOLD. The current price yields about 5.6% for FY10F dividends.