• 2Q18 revenue in line with our estimate
• 2Q18 EBIT, Associates/JVs and PATMI came in lower than our estimates by 16.3%, 14.5% and 15.9% respectively
• 1H18 revenue, EBIT and PATMI met 48.4%, 40.9% and 44.8%, respectively of consensus full year expectation
• Strong contribution from Associates offsetting weaker EBIT to lift PATMI
• 4 cents interim dividend declared, unchanged from previous year

The positives

• YoY higher profit from associates: This was mainly from Eagle Services Asia (ESA) with the same reason as previous quarters – heavier work content from the PW4000 engine, as operators delayed retirement of classic B747 fleet due to low fuel prices. Contribution from ESA is expected to sustain at this level, until the PW4000 gets phased out and work content transitions to the PW1100G (installed on A320neo).
• Market share of flights handled at Changi Airport remains largely intact: Operationally, SIAEC handled 3.8% YoY more flights for 1H18, which was in line with the 4.1% YoY growth at Changi Airport for the same period.

The negatives

• Staff costs and subcontract costs dragged EBIT lower YoY: Staff costs (largest cost component) was 5.3% YoY higher, outpacing revenue growth. Higher subcontract costs (third-largest cost component) was due to outsourcing of aircraft painting to a specialist since January 2017. Consequently, subcontract costs grew 7.5% YoY and also took up a bigger chunk of revenue, from 12.1% in 2Q17 to 12.5% in 2Q18.
• YoY lower profit from JV: Two factors have contributed to the persistent weakness from Singapore Aero Engine Services (SAESL). Higher engine reliability has resulted in lower work content and supply chain issues on spares has impacted throughput. Quarterly JV profit from historical high of high-$20 mn range has been decimated to mid-single-digit mn in recent quarters.

Outlook

The outlook remains challenging. Despite the YoY higher 2Q18 PATMI, margins continue to compress, and PATMI came in lower than our expectation. Absence of strong catalyst will keep the share price muted, in our view. However, SIAEC has a strong balance sheet with a net cash position, which it is utilising to start new ventures.

Upgrade to Neutral (from Reduce); lower target price of S$3.35 (previously $3.70)

We have incorporated 1H18 results into our FY18e estimate, and made some adjustments to our margin assumptions and profit contribution from associates/JVs. Our FY18e/FY19e PATMI is now 8.6%/14.9% lower than previous estimates. We have also lowered our FY18e/FY19e ordinary dividend forecast to 12.0/12.5 cents from 13.0/14.5 cents previously

Our target price gives an implied FY18e forward P/E multiple of 24.6x. This compares against the STI next 12-months forward P/E multiple of 15.0x.