Asia Aviation

Asia Aviation Plc (AAV)

 

2Q14 net loss Bt176mn (Bt0.04/share), down from net profit of Bt265mn in 2Q13 and Bt139mn in 1Q14. Excluding gain on foreign exchange, core loss was Bt199mn. This was its first loss since listing in 2012 and worse than consensus expectation of a loss of just ~Bt1mn, mainly due to weaker revenue than expected because of the hit to tourism while costs and expenses grew faster from fleet expansion and YoY baht depreciation. In 1H14, AAV had a net loss of Bt37mn against a net profit of Bt662mn in 1H13.

AAV fine-tunes 2014 targets. At the analyst meeting on Friday, AAV says it has adjusted its 2014 targets after the poor 2Q14. The changes include reducing the number of new planes in 2H14 to three from four, giving it a fleet of 40 planes at the end of this year, adding five aircraft in 2014 rather than six. It also now expects to carry 12.1mn passengers rather than 12.6mn with a load factor of 80% (down from 83%). 

Earnings to be better in 2H14. We believe AAV’s earnings bottomed in 2Q14, with a QoQ rise in 3Q14 to a lower net loss and then back to profit in 4Q14 when tourism gets back to its uptrend. Our view is supported by:

 - Improving passenger numbers according to AOT. Total passengers slid 3% YoY in July but then turned positive at 1.5% YoY during 1-6 August vs. -11% YoY in June. 

 - AAV says July load factor was 81%, up from 78% in 2Q14, though still below 84% in 3Q13. AAV expects average fare in 3Q14 to relatively low and stagnant compared to 2Q14 since it is the low tourism season.

 - Positive industry backdrop #1: Visa fees are being waived for tourists from China and Taiwan for three months (August 9 – November 8); Chinese tourists account for 20% of AAV’s revenues.

 - Positive industry backdrop #2: Greater stability after an interim government is seated (expected in August-September). This is expected to lead to a lifting of martial law, generating greater tourist confidence. With this, we expect pent-up demand to be released, especially in markets highly sensitive to political unrest. Thai tourism is expected to recover in time to enjoy the high season in 4Q14.

Cut 2014 but maintain 2015-16. After the poor 2Q14 and new company guidance, we have slashed core profit forecast to Bt46mn from Bt597mn. This is based on stronger earnings in 2H14 (Bt51 core loss in 1H14 vs. Bt97mn core profit in 2H14). Our 2015-16 forecasts are affected very little by this, as we expect a strong earnings recovery after the unusual 2014. We believe the losses in 2014 are partially priced in as AAV’s share price has underperformed the SET by 21% over the past 12 months and the better backdrop for the industry as a whole should be price catalysts. AAV is our preferred airline stock and our top pick in the tourism sector. We maintain BUY on AAV with mid-2015 TP at Bt5.0/share. Risk and concerns: the Ebola epidemic.

2Q14 highlights: 

 - Thai tourism was weak in 2Q14, particularly in June after the declaration of martial law in late May. International tourist arrivals were 5.3mn, down 12% YoY and 19% QoQ. Arrivals from China, a major market supplying 15% of total international tourist arrivals in 1H14, fell 29% YoY and 13% QoQ, as this market is highly sensitive to political tension. Since Chinese tourists account for ~20% of AAV’s revenues, it felt the pain of the drop in Chinese tourists.

 - AAV’s load factor was 78% in 2Q14, down from 83% in 2Q13 and 80% in 1Q14. Available Seat Kilometer (ASK, mn seat-km) rose more than Revenue Passenger Kilometer (RPK, mn seat-km). ASK increased by 20% YoY (but slid 4% QoQ) due to fleet expansion to 37 planes in 2Q14 from 29 planes in 2Q13 (flat QoQ). RPK increased 12% YoY but fell 7% QoQ as AAV carried 2.8mn passengers in the quarter, up 18% YoY but down 10% QoQ. 

 - Average fare was Bt1,612/pax, down 14% YoY and 6% QoQ from intense competition due to slower tourist demand but more seats on more planes. 

 - Ancillary revenue per pax was Bt341, +2% YoY but -8% QoQ. The YoY increase was driven by the Fly-Thru service.

 - RASK-CASK was –Bt0.17 vs. +Bt0.14 in 2Q13 and +Bt0.05 in 1Q14. Negative spread between RASK and CASK was due to weak revenues per ASK (RASK declined 15% YoY and 12% QoQ) against relatively unchanged costs per ASK (CASK increased 2% YoY and 1% QoQ).

 - Average exchange rate was Bt32.4/US$ in 2Q14, relatively flat QoQ but depreciating 9% YoY. Depreciation of the baht hurts, since major costs such as jet fuel and aircraft leases are in US$ (~60% of total cost in 1H14).