Asia Aviation

Superior growth profile

Asia Aviation Plc (AAV)



Investment thesis

In our view, AAV's recent share price rally has somewhat priced in expectations of strong 4Q12 profit growth. But we think its hefty core earnings growth profile—an FY12-14 CAGR of 56% against 14percent for the SET—should constitute a share price catalyst going forward. The stock currently trades at an FY13 PEG ratio of only 0.27x, a discount to the regional low-cost carrier mean. Given its superior profit growth profile, we think AAV deserves to trade at a premium to regional peers.

Anticipate strong 4Q12 earnings growth

We expect a 4Q12 net profit of Bt411m, up by 33% YoY and 282% QoQ. 4Q12 core earnings should post a rise of 41% YoY and 306% QoQ, driven by: 1) greater air traffic, 2) a higher mean seat fare and 3) increased ancillary income. AAV's RPK rose by 22% YoY and 12% QoQ to 2,321m. The average seat fare is expected to have risen 3% QoQ to Bt1,972 (flattish YoY), fueled by tourism high season. In addition, 4Q12 ancillary income should have increased 6% QoQ to Bt360, driven by revenue from baggage handling fees.

Earnings growth momentum to be sustained through 1Q13

The first-quarter is normally the best period of the year for Thai tourism. Historical data indicate that Thai AirAsia (TAA)'s traffic normally expands by 15% QoQ during that quarter. As such, we expect its core earnings growth to sustain momentum through 1Q13. Moreover, TAA plans to launch some new ancillary products, such as Fly-Thru and Red Carpet Services in 1Q13, which should boost ancillary income further.

Aggressive passenger growth target looks achievable and …

Management targets total passenger expansion of 20% YoY to 10m pax this year and to 16m pax by FY16. That translates into an 18percent FY13-16 CAGR. Increasing flight frequency in order to serve fast-growing demand for travel—particularly in China and Asean countries—and fleet expansion will drive growth. Based on AAV's FY08-12 CAGR of 19% (with a rising market share), we think its growth target for the next four years is achievable.

…a superior forward earnings expansion profile

While top-line growth is on-track, operating costs are expected to decline going forward, due to lower airport expenses, the building of economies-of-scale and lower marketing costs. In order to factor in our revised assumptions (see Figure 6), we have upgraded our net profit forecasts by 12% to Bt1,596m for FY13 and by 6% to Bt2,218m for FY14.

Our revised YE13 target price is Bt7.6, pegged to a weighted average FY13 PER of 14x, an EV/EBITDA of 8.3x and a forward PEG ratio of 0.5x—a 5% premium to the average multiples of regional low-cost carriers. There is also scope for upside to our earnings forecast from: 1) higher-than-expected fare/ancillary income and/or 2) fuel cost savings brought about by efficiency improvements.