Singapore Airlines - Sell: SATS 1Q FY10 Net Profit S$40.4m

1Q profit 23% of consensus FY10E S$173m: SATS profit S$40.4m (- 4%qoq, +17%yoy) post consolidation of SFI saw a +44%yoy (+8%qoq) rise in revenues but a +50%yoy (+10%qoq) rise in costs. Aviation-related revenues fell 12%yoy and c.3%qoq, but mgmt indicated that there were some signs of bottoming out. SATS is 81% owned by SIA, but assuming a proposed distribution in specie is approved at the July 31 EGM, SATS will cease to be a SIA subsidiary likely toward the end of August 2009.

Operating performance: 1Q operating profit S$43.7m reflected generally weaker business volumes (unit services -7%yoy, unit meals -17%yoy, cargo -18%yoy, passengers handled rose -5%yoy), although flights handled rose 6%yoy as SATS took over the Tiger Airways contract in April 2008 and LCCs saw increases in flights handled. Operating expenses were helped by a S$6.1m contribution from the Jobs Credit Scheme, while SFI integration has realized cost savings to date of S$2.6m p.a. SATS also won a 5+5 year contract to provide flat sheets laundry services to Resort World Sentosa.

Overseas associates: 1QFY10 PBT contribution from AJVs rose to S$9m (4Q: S$4m), largely due to a non-recurrence of a S$3.7m VAT provision. There were improved operational performances from the ground-handling JVs in Indonesia (PT JAS) (higher volumes) and in Beijing (BGS) (lower costs).

Balance sheet: June 2009 cash and equivalents were S$367m, but some of this may be deployed to repay a S$200m term loan maturing Sep-09. Capex for the year is expected to be S$60-70m.

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