• PATMI was 44% higher than expected, driven by positive surprise from JV
• 9M18 revenue, EBIT and PATMI met 74%, 68% and 82%, respectively of consensus full-year expectation
• Strong contribution from JV and stable performance of associates compensated for the weaker core company EBIT to lift PATMI
• Upgrade to Accumulate, on the belief that the worst is behind us for JV contribution

The Positives

• Contribution from associated & JV companies grew 29.1% YoY. This was mainly due to contributions from the repair and overhaul centres, which saw a $9.1mn or 29.6% YoY increase. Share of profits from line maintenance segment remained flat.
• Positive surprise of 60% YoY and 387% QoQ higher profit of $22.9mn from JV. The increase in contribution from associated & JV companies was substantially attributable to the Singapore Aero Engine Services Pte Ltd (SAESL) JV, which deals in Rolls Royce engine and component repair and overhaul. The sharp increase after three consecutive quarters of under S$5.0mn contribution came as a surprise, in view of the ongoing structural issue of new engines requiring less frequent servicing and lower work content.
• Contribution from associates remained stable YoY at $17.9mn, indicating that contribution from Eagle Services Asia (ESA), a Pratt & Whitney associated company, remained stable.

The Negatives

• Core company EBIT remains weak, coming in lower than our 3Q18 and the Street’s 9M18 estimates: 3Q18 staff costs (largest cost component) was 1.4% YoY lower, but material costs (second largest cost component) was 5.5% YoY higher. The largest movement was the S$5.8mn or 31% YoY increase in other operating expenses. The 2.3% YoY higher opex aggravated the already lower revenue.

Outlook

The outlook remains challenging. Despite the positive surprise for JV, we are not ready to call a return to historical normalised levels. The same level of 3Q18’s $22.9mn JV contribution was last seen in FY14, and we think such a V-shaped recovery is unlikely, in view of the structural issue mentioned above. While the worst may be over for JV contribution, we are inclined to believe that the long-term normalised contribution will still be lower than historical level.

Upgrade to Accumulate (from Neutral); higher target price of S$3.39 (previously $3.35)

Our FY18e/FY19e estimate for profit contribution from associates & JVs is 32%/16% higher than previous. Consequently, our FY18e/FY19e PATMI estimates are 15.6%/5.6% higher than previous.

FY17 dividend distribution of 13.0 cents should be sustainable for FY18e (3.9% yield), in view of the positive free cash flow, dividends received from associated & JV companies and a balance sheet that is in a net cash position. (1H18 interim dividend of 4 cents was unchanged from 1H17.)