Asia Aviation

Asia Aviation Plc (AAV)

Investment thesis
AAV’s share price outperformance should sustain momentum through YE13, driven by strong YoY earnings growth. Furthermore, we think its hefty core profit expansion profile—an FY13-15 CAGR of 39% against 8% for the SET—will make for long-term price upside. The stock currently trades at an FY13 PEG ratio of 0.4x, a discount to the regional low-cost carrier mean of 0.6x. Given its superior profit growth profile, we think AAV deserves to trade at a premium to regional peers. 
Solid YoY earnings growth expected for 2Q13
We expect AAV to post a 2Q13 net profit of Bt351m, down 98% YoY (due to an extra gain on the fair value of previously held equity interests booked in 2Q12) and 12% QoQ. Stripping out an assumed FX gain of Bt15m, core earnings would be Bt336m, up 302% YoY but down 15% QoQ. The drivers of the modeled YoY core profit expansion were: 1) fleet expansion, 2) greater air traffic and 3) higher ancillary income. The factors behind the QoQ core profit contraction were: 1) weaker air traffic, due to low season, 2) a lower average seat fare and 3) lower ancillary income.
AAV’s fleet expanded to 29 aircraft as of end-June 2013 from 24 at end-June 2012. The number of passengers in 2Q13 is estimated to have increased 23% YoY (but declined 7% QoQ on seasonality) to 2.4m, while the load factor is expected to have risen to 82% from 79% in 2Q12 (but declined from 87% in 1Q13). The mean seat fare is assumed to have softened by 1% YoY and 3% QoQ to Bt1,935. 2Q13 ancillary income should have risen 11% YoY (but dipped 3% QoQ) to Bt346 per passenger.
YoY earnings growth to be sustained through 3Q13, but ...
The third-quarter is also low season for Thai tourism, but we expect AAV to post YoY earnings growth for 3Q13. The key drivers are: 1) fleet expansion, 2) greater air traffic and 3) increased ancillary income. The fleet will expand to 31 aircraft by end-September 2013 from 25 at end-Sept 2012. Even though capacity will rise YoY, the load factor is expected to be sustained at 82% in 3Q13, supported by strong demand for air travel. Passenger growth should remain strong at 20-25% YoY. Moreover, ancillary income is expected to increase YoY, driven by price rises and the launch of new ancillary products, such as EMS Super Speed.
…earnings to soften QoQ as low season continues
The third-quarter is normally the weakest period of the year for AAV. Even though the number of passengers is expected to be flattish QoQ, the average seat fare is likely to soften QoQ. However, we expect ancillary income per passenger to rise QoQ, fueled by both pricing and new products, as mentioned above.