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Asia Aviation

4Q13 number beat estimate; weaker 1Q14 profit expected & priced in

Asia Aviation Plc (AAV)

Investment thesis

Above estimates

AAV reported a 4Q13 net profit of Bt222m, down 18% YoY but up 41% QoQ. Stripping out an FX gain of Bt88m, core earnings would be Bt134m, down 51% YoY but up 11% QoQ. The bottom-line was 12% above our estimate and the consensus because of a bigger FX gain than modeled. However, core profit was 26% below our number and 30percent short of the street, due to a higher effective tax rate and heavier SG&A expenses than assumed. For FY13, AAV posted a net profit of Bt1,043m, down 93% YoY (a huge extra gain was booked in FY12) and core earnings of Bt785m, up 2% YoY.

Results highlights

The key factors behind the YoY earnings contraction were: 1) a lower mean seat fare and 2) higher SG&A expenses. The QoQ profit growth was due to: 1) fleet expansion, 2) greater air traffic and 3) increased ancillary income.

AAV's fleet expanded to 35 aircraft as of YE13 from 27 at YE12 and 31 at end-Sept 2013. Passenger numbers in 4Q13 increased by 30% YoY and 16% QoQ to 3.0m, while the loading factor softened slightly to 81percent from 82% in 4Q12 and 83% in 3Q13. The average seat fare declined by 14% YoY and 1% QoQ to Bt1,825. Ancillary income rose by 8% YoY and 13% QoQ to Bt392/passenger. The SG&A/sales ratio was 8.7%, up from 5.1% in 4Q12 and 7.6% in 3Q13, led by higher advertising & marketing expenses.

Outlook

The political chaos has dampened air travel demand to and within Thailand; demand weakened further after the govt announced a State of Emergency. As such, we expect AAV's QoQ passenger growth to decelerate in 1Q14. The firm will probably offer promotional fares to boost demand. In that case, passenger yield would fall both YoY and QoQ—we expect AAV's 1Q14 core earnings to weaken both YoY and QoQ. However, we also anticipate that air traffic numbers will rebound swiftly once the situation normalizes.

What's changed?

The firm will spend heavily on additional advertising & marketing to boost sales, so we have raised our FY14 SG&A/sales ratio assumption to 7.5percent from 6.5%. As such, we have cut our FY14 net profit forecast 10% to Bt1,361m and our FY14 target price from Bt4.60 to Bt4.50.

Recommendation

The market has already anticipated and priced in weaker air traffic and passenger yield (due to political unrest). Even under our worst-case scenario, AAV should still post 16% core profit growth for FY14 against 14percent for the SET. The stock currently trades at a YE14 PBV of 0.6x and an EV/EBITDA of 6.8x, discounts to the regional low-cost carrier means of 1.0x and 7.9x, respectively. Share price downside risk appears limited.


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