Asia Aviation

Asia Aviation Plc (AAV)

Investment thesis
AAV’s weakest quarter is now behind us and the market has already priced it in, we believe. Moreover, QoQ earnings growth momentum through 2H14 and expectations of a sharp rebound in air traffic growth next year should catalyze the share price going forward. Soft FY14 numbers should be followed by a strong earnings CAGR of 33%, FY14-16. The stock trades at an FY15 PEG ratio of 0.2x, a discount to the regional LCC mean of 0.4x.   
2Q14 earnings would have hit hard by the Martial Law   
The second-quarter is low season for Thai tourism. The imposition of martial law on May 20 discouraged tourist arrivals to Thailand even further—especially from North Asian markets (China, Taiwan, Hong Kong, Japan). As Chinese passengers comprise about 20% of Thai Air Asia’s (TAA) total passengers, its 2Q14 passenger numbers are expected to post a drop of 12% QoQ (but still YoY growth of 14%) to 2.8m people. In addition, the load factor is expected to fall to 78% in 2Q14 from 87% in 2Q13 and 80% in 1Q14.
The weak international passenger numbers (which normally command higher fares) also resulted in average fare and ancillary income slippage in 2Q14 (Figure 2). However, a lower QoQ jet fuel cost for the quarter would have mitigated the effect of diminished revenue. With those factors in mind, we expect AAV to post a 2Q14 net loss of Bt163m, a reversal from the net profits reported for 2Q13 and 1Q14.
QoQ core profit expansion expected for 3Q14 despite low season
Even though the third-quarter is still low season for Thai tourism, we expect foreign tourist arrivals and TAA’s passenger numbers to rebound QoQ in 3Q14, driven by several incentives—for example, visa entry fee exemptions for Chinese and Taiwanese tourists from August 1-October 31, 2014 and the launch of “Thailand Travel Shield” insurance.
There were recovery signs in June—the number of foreign arrivals increased from 49,052 people/day in the first week of the month to 54,469 people/day in the fourth week (Figure 4). More international passengers would also mean average seat fare and ancillary income growth for TAA. Note that AOT’s total passenger numbers during 1-28 July reaffirmed the recovery—passenger numbers declined only 4% YoY (and rose 18% MoM) against an 11% YoY drop in June. As such, we expect AAV’s 3Q14 core operation to turn around QoQ to profit.
Assumed weak 2Q14 numbers prompted FY14 forecast cut
The firm’s 2Q14 operational performance is now expected to be weaker than what we previously envisaged—we have diminished expectations for average seat fare and ancillary income. As such, we have downsized our key assumptions for FY14 and slashed our full-year net profit forecast 52% to Bt351m.