• 1H revenue and PATMI were 4.5% and 13.6% lower respectively than our estimate
• Lower 1H EBIT was completely offset by higher associates/JVs
• 3 cents interim dividend declared, lower than last year’s 4 cents
• Downgrade to Neutral, new target price of $2.81 (previously $3.56) as we cut our FY19e and FY20e earnings estimate by 16% and 14%

The Positives

• Strong contribution from Associates & JV fully compensated lower EBIT. This came mainly from the engine and component centres (+41% YoY). SAESL (JV with Rolls-Royce) had benefitted from the ongoing Trent 1000 issues of durability and replacement of affected parts, resulting in higher shop visits. Eagles Services Asia (ESA, associated company with Pratt & Whitney) saw more engines and higher work content. However, the PW4000 engine will eventually be phased out, and ESA has built up capabilities to service the new GP7200 and GTF engines. As such, we expect the annual combined base load from SAESL and Eagle to remain relatively stable at ~$80mn for at least the next 1 to 2 years.

The Negatives

• Core Company EBIT continues to weaken. Larger variable costs such as labour, material and subcontract were lower YoY, but it was insufficient to mitigate the lower revenue. The Airframe overhaul and line maintenance business unit was the largest contributor to lower revenue. Lower number of ‘C’ Checks because they of heavier work content compared to last year and this resulted in a longer turnaround (i.e. lower throughput).
• YoY lower 1H interim dividend, despite 4.2% YoY higher 1H PATMI. This resulted in a lower payout ratio of 42.7% compared to 59.5% last year. Management commented that it was a Board decision to be conservative as the Company is going through a transformation of embarking on forming new partnerships and capabilities. The lower interim dividend should not be taken as a signal that the final dividend would be lower as well; the Board will reassess the situation and there is the possibility for full year dividend to at least be equal to last year.

Outlook

The outlook is challenging. Core Company operations remain challenged by longer maintenance intervals and lighter work content, but there appears to be a pipeline for engine shop visits at the associates/JV level which will contribute positively. We see a trend of increasing proportion of bottom line contribution coming from associates/JV.

Downgrade to Neutral; new target price of S$2.81 (previously $3.56)

We have cut our estimates for the core Company. Consequently, FY19e/FY20e PATMI are -16%/-14% lower than previous. SIAEC is in a net cash position and offers a dividend yield of 4.1%. Our target price gives an implied FY19e forward P/E multiple of 20.6 times.