Asia Aviation

Q4 2012F: High altitude in high season BUY

Asia Aviation Plc (AAV)

Q4 2012F net profit of Bt410mn. This reflects growth of 33% YoY and 281% QoQ. The

growth is derived from: 1) a high load factor at 82% (vs. 78% in 4Q11 and 82% in 3Q12);

2) delivery of three new aircraft (+13% of existing fleet) in Sep-Nov 12; 3) slight

improvement in average fare rate - YoY from last year's low base from the floods and

QoQ from seasonality; 4) an increase in baggage handling fees in 2Q12-3Q12 and a rise

in fuel surcharge on international routes (40% of its routes) in Sep 2012; 5) cost

savings, including 30% lower landing/parking fees and 1% lower jet fuel costs from the

shorter runways and shorter queues for takeoff/landing, from the move to Don Muang

on Oct 1, 2012. These help to offset the negative impact from the rise in jet fuel to

US$129/barrel (+3% YoY and +8% QoQ). The results will be released on February 26.

Impressive 2013F earnings growth. To bring us closer to guidance, we trimmed

core earnings by 5% in 2012 and 4% in 2013F. Even after this, 2013F core earnings will

grow strongly at 45%, backed by both company-specific and industry factors. The

company-specific factors include a full year of cost savings from the use of Don Muang

from the 10-30% reduction in airport charges for Oct 2012-Sep 2015 and 1% lower jet

fuel costs from the shorter runways and shorter queues for takeoffs and landings

(~50% contribution to 13EPS growth), fleet expansion (+7 aircraft or +26% of fleet

capacity), route expansion to destinations with strong demand (domestic, Indochina

and South China), and an increase in ancillary income to sales (+0.5%) via the

introduction of new products (Red Carpet in Dec 2012, in-flight entertainment in 1Q13

and lounge and flythrough in 2013). The industry factor is the exciting growth

potential for low cost carriers (LCCs). Of total seats, Southeast Asia's LCC capacity

accounted for 32%, still behind the EU's 39%.

Net positives from baht appreciation. We expect AAV to enjoy a net positive from

the appreciation of the baht. Thirty percent of its revenue comes in a wide range of

foreign currencies (SGD/HKD/MYR/CNY/US$) with operating costs denominated in

foreign currencies (mostly US$) at 70%. It also has foreign denominated debt (US$) of

~US$35mn at the end of 2012. Our sensitivity analysis suggests that each 1%

appreciation of the baht against foreign currencies will enhance its earnings by 2-3%.

Maintain BUY. We maintain BUY with a new end-2013 PT of Bt7.2 (from Bt5.3), based

on 24.5x PE vs. 2-year EPS growth of 33% (+1.5SD on 7-year PE on Air Asia Berhad vs.

average EPS growth of 20%). We like AAV for: 1) its solid 4Q12-1Q13 results

underwritten by the high season and lower costs after the move to Don Muang;

2) impressive two-year earnings growth of 32%, backed by company specific factors -

the move to Don Muang and the fleet expansion - and industry factors - the LT

growth potential for LCCs