The market has already anticipated and priced in weaker air traffic and passenger yield assumptions (due to political unrest), we believe. AAV’s share price is now close to our worst-case target price. Even under our worst-case scenario, the firm should still post 16% core profit growth for FY14 against 14% for the SET. AAV currently trades at an FY14 PBV of 0.6x and YE14 EV/EBITDA of 4.1x, discounts to the regional low-cost carrier means of 1x and 7x, respectively. Share price downside risk appears limited.
Tourism high season—strong QoQ core profit growth in 4Q13
We expect AAV to post a 4Q13 net profit of Bt198m, down 51% YoY but up 25% QoQ. The key factors behind the assumed YoY earnings contraction were: 1) a lower mean seat fare, 2) reduced ancillary income and 3) higher SG&A expenses. The modeled QoQ profit growth was due to: 1) fleet expansion, 2) greater air traffic, 3) a higher average seat fare and 4) increased ancillary income. AAV’s fleet expanded to 35 aircraft as of YE13 from 27 at YE12 and 31 at end-Sept 2013 (details in Figure 2).
Political unrest to squeeze 1Q14 earnings …
The political chaos has dampened air travel demand to and within Thailand; demand weakened further after the govt announced a State of Emergency. 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. We believe the historical pattern will repeat itself this year. 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 that AAV’s 1Q14 core earnings to weaken both YoY and QoQ.
… prompting FY13 and FY14 earnings projection cuts
In order to fine-tune our latest 4Q13 forecast for events on the street, we have cut our FY13 net profit estimate by 16% to Bt1,018m. We have also slashed our FY14 earnings forecast by 24% to Bt1,519m to factor in more conservative assumptions, as the ongoing political imbroglio could drag on for months (Figure 4). Our YE14 target price falls to Bt4.50 (from Bt6.90), pegged to FY14 PER of 16x and a YE14 EV/EBITDA ratio of 7x—the mean for regional low-cost carriers.
Risk of further downside to our profit model
AAV would benefit from baht depreciation, as it has net-dollar-denominated assets. But we think the prevailing political unrest entails downside risk to its FY14 earnings profile. Our sensitivity analysis suggests that the firm’s net profit could decline by 7-36% from our base-case scenario if pricing were 1-5% lower than our base-case assumption (Figure 5). Our profit forecast could fall by 6-31% if passenger growth were 1-5% lower than our base-case expectation.