Asia Aviation

Shaping up to be AAV's year

Asia Aviation Plc (AAV)

Investment thesis

In our view, expectations of strong 1Q13 profit growth together with AAV's hefty long-term core earnings profile—an FY12-14 CAGR of 58% against 15percent for the SET—should make for substantial share price upside in the months ahead. The stock currently trades at an FY13 PEG ratio of only 0.26x, a deep discount to the regional low-cost carrier mean of 0.5x.

Strong 4Q12 earnings growth

AAV posted a 4Q12 net profit of Bt408m, up by 32% YoY and 279% QoQ. The drivers were: 1) greater air traffic, 2) a higher mean seat fare, 3) increased ancillary income, 4) lower SG&A expenses and 5) a change in accounting method from 51% proportionate consolidation in 4Q11 to full consolidation since May 2012. AAV's revenue passenger kilometers (RPK) rose by 22% YoY and 12% QoQ to 2,321m. The mean seat fare increased by 5% YoY and 10% QoQ to Bt2,110, fueled by tourism high season. In addition, 4Q12 ancillary income grew 7% QoQ to Bt364 per pax, led by higher baggage handling fees. The SG&A/sales ratio dropped to 4.7percent from 5.8% in 4Q11 and 6.8% in 3Q12.

Earnings growth momentum to be sustained through 1Q13

We expect both YoY and QoQ core profit growth through 1Q13, driven by higher air traffic numbers, a higher average seat fare, and greater ancillary income. Historical data indicate that Thai AirAsia's (TAA) traffic normally expands 15% QoQ during the first-quarter. During Jan-Feb 2013, its loading factor increased to 84percent from 82% in 4Q12. Moreover, the average seat fare is expected to rise 11% YoY (flat QoQ) to Bt2,110 and ancillary income by 3% YoY (flat QoQ) to Bt364 per pax.

Good prospects for FY13; scope for earnings upside

This year is shaping up to set new records for tourism and for AAV. We expect superior earnings growth, driven by both volume and pricing. Increasing flight frequencies in order to serve fast-growing demand for travel—particularly from China and Asean countries—and fleet expansion (from 24 aircraft at YE12 to 34 by YE13) will enable substantial passenger growth for the carrier in FY13. AAV targets a 20% YoY rise to 10m pax.

Apart from volume growth, the firm guides that in FY13 the mean fare will rise by not more than 5% YoY and ancillary income by about 8% YoY (to Bt383 per pax). We conservatively assume a flat mean fare and only 3% ancillary income growth (to Bt363/pax). So the guidance represents upside to our model.

Aggressive fleet expansion plan to enable long-term earnings growth

AAV recently announced that it plans to expand its fleet to 53 aircraft by YE16; it had earlier guided for only 48 planes by that date. With tourist arrivals projected to continue to rise, a bigger fleet would be necessary in order to keep up with demand.