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Asia Aviation

Survivor of tough times; leader during periods of growth

Asia Aviation Plc (AAV)

Investment thesis

The market has already anticipated and priced in the weak 1Q14 earnings outlook (due to political unrest), we believe. 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 ratio of 6.8x, discounts to the regional low-cost carrier means of 1x and 7x, respectively. Share price downside risk appears limited.

Political chaos to hit 1Q14 profit; demand will bounce when it eases

AAV's QoQ passenger growth is expected to decelerate in 1Q14, due to the prevailing political unrest (demand weakened further after the govt announced a State of Emergency in December). AAV's load factor in 1Q14-to-date is about 78%. The passenger yield is also expected to weaken both YoY and QoQ on promotional fares offered to boost sales. We, therefore, expect AAV's 1Q14 core earnings to decline both YoY and QoQ.

Looking to the historical record, in 2010 AOT's passenger numbers dropped for two straight months after the govt announced a State of Emergency on April 7. But traffic numbers rebounded swiftly once the situation normalized in late May. Management shares our belief that the historical pattern will repeat itself this year. We expect air traffic numbers to rebound once the situation eases.

Challenging but achievable FY14 targets

Management has set business targets for FY14 as follow: 1) passenger numbers of 13.3m people (up 27% YoY), 2) a load factor of 84% (a slight increase from 83% in FY13) and 3) ancillary income of Bt368/pax (up 3% YoY). Assuming that the political situation normalizes within 1H14, we think the firm's targets are challenging but achievable.

Why? Firstly, air travel demand to and within Thailand remains strong—historical data suggest that AAV's passenger numbers increased at a 20% CAGR in FY09-13 (in tandem with the fleet expansion) and its load factor has risen fairly consistently over the past five years (from 76% in FY09 to 83% in FY13). Secondly, the firm will continue to tap growth from new routes, such as southern China, Indochina and domestic destinations. Thirdly, the launch of new ancillary products and services, such as Fly-Thru, Red Carpet and car rentals. However, we think that AAV will have to sacrifice passenger yield, given intense competition among low-cost carriers. We expect its passenger yield to decline 5% YoY in FY14.

Scope for earnings upside from TAAX

There is a scope for upside to earnings from the commercial operation of Thai Air Asia X (TAAX; it is expected to start flying in mid 2014). Management guides that TAAX will contribute a 1% incremental load factor to AAV in FY14. Under that scenario, its FY14 net profit would beat our current forecast by about 7%.

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