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Asia Aviation

Clearer skiers ahead

Asia Aviation Plc (AAV)

Investment thesis

AAV's weakest quarter is now behind us, we believe. Moreover, QoQ earnings growth momentum through 2H14 and expectations of a rebound in air traffic growth next year should catalyze the share price going forward. Even factoring in a forecast downgrade, AAV should still post strong earnings growth of 39% YoY for FY15 (against 16percent for the SET). The stock trades at an FY15 PEG ratio of 0.37x, a discount to the regional LCC mean of 0.43x.

Expect 2Q14 earnings to bottom-out

As the second-quarter is low season for Thai tourism and the political unrest peaked in early 2Q14 (followed by a coup on May 22), AAV's passenger numbers for the quarter are expected to weaken by 11% QoQ (its historical mean slippage for the second-quarter is 9% QoQ) to 2.8m. We still expect AAV to post YoY passenger growth of 14percent for 2Q14, but that would be far short of its historical mean of 20% YoY. Also, in the weak travel demand climate that prevailed in 2Q14, the firm offered promotional fares to boost sales. As such, we expect its announced core profit to drop both YoY and QoQ for the quarter (the weakest earnings period for the year, we assume).

Air traffic numbers to recover through 2H14

As the post-coup political situation has been much calmer, demand for air travel should rise QoQ through 2H14. The historical data show that air traffic numbers normally rebound swiftly within a few months of the end of civil unrest (or after a coup). So we expect AAV's 3Q14 passenger numbers to rise QoQ (the third-quarter is normally flat QoQ, as it is still low season). Also, the firm's air traffic numbers should expand further in 4Q14, driven by high season. Improving demand would mean fewer promotional fares and higher ancillary income.

The outlook for next year is much better

The political chaos will prove to be a short-term hiccup within a broad uptrend for Thai tourism and Thai airlines, we believe. Foreign arrivals to the country rose at an 8.5% CAGR, 1998-2013. Moreover, the rate doubled to a 17% CAGR, 2009-13. The strong growth rate proves Thai tourism's resilience to exceptional events, such as epidemics, natural disasters and civil unrest. We, therefore, expect air traffic growth to normalize next year. With aggressive fleet expansion and growing LCC penetration, we believe AAV's traffic growth will continue to outpace the industry average. Note that historically its passenger growth was 2x that of the passenger growth reported by AOT.

Weak 1H14 demand & fares prompt deep forecast cut

Our FY14 net earnings projection dives by 46% to Bt738m and our FY15 number by 40% to Bt1,047m to reflect lower fare assumptions (see Figure 4). We have also rolled our investment horizon to YE15 and derived a new target price of Bt5.40, pegged to PEG of 0.43x (in line with the regional average for LCCs).




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