Asia Aviation

Asia Aviation Plc (AAV) 

Despite a 13% rise over the past three months, we expect to see share price rally further, backed by record earnings in 1Q15. The skies are clear with stronger Thai tourism leading to more passengers and higher fares and falling jet fuel price. We maintain our BUY call on AAV with TP at Bt7.5/share. 

 

Positive guidance in 2015. AAV’s management views 2014 as an aberration and expects 2015 to be better than 2013. Its 2015 targets include: 1) 14.5mn passengers (up 19% from 12.2mn in 2014), 2) 83% load factor (up from 80% in 2014), 3) 3-5% fare increase from 2014 average of Bt1,726/pax, 4) ancillary revenues of Bt371/pax (up 3% from Bt359/pax in 2014) and 5) five additional aircraft (two already delivered, one in 1H15 and two in 2H15) to add to the 40 aircraft at the end of December 2014.  

 

We are positive on rising fare. In 4Q14, average fare growth turned to positive at 6% YoY (Bt1,944/pax) after contracting for six quarters since 2Q13, pulled down by the political uncertainty that weakened Thai tourism. Management says that the rise in fare is backed by the return to health of the Thai tourism industry and less fare pressure on domestic routes. The strength seen in 4Q14 is continuing into 1Q15, supported by a strong influx of tourists mainly Chinese, its key high-yield market (~20% of revenue), during Chinese New Year in February. We assume average fare at Bt1,800/pax in 2015 or 4% YoY growth, in the middle of the company target.  

 

Windfall of falling jet fuel price to pay off more in 1Q15. In 4Q14, AAV’s fuel cost/ASK was Bt0.73, down 4% YoY but relatively flat QoQ at the same time that jet fuel spot price fell 26% YoY and 21% QoQ. The lower magnitude for the decline in fuel cost/ASK against spot price reflects the company’s hedging at a higher price. Since December last year, AAV reduced its hedging position to 10-15% and in February raised this again to 50% of usage in 1H15 at an average hedging price of US$80/bbl. The low hedging position in January–February allowed it to get in on the windfall from falling jet fuel price (QTD average jet fuel spot price is down 44% YoY and 26% QoQ) and this should be more apparent in 1Q15 earnings. 

 

1Q15F to be a record high. With double positives lying in higher revenues, backed by rising passengers and average fare, and the windfall from falling jet fuel price, we expect AAV will enjoy strong earnings in 1Q15 to a record core profit of Bt600-650mn. For 2015, we maintain our projection of core earnings of Bt1.8mn, a V-shaped recovery from Bt114mn in 2014. 

 

BUY maintained. TP at Bt7.5/share. Despite the 13% rise in share price over the past three months, we expect the share to rally further, backed by the expectation of record high earnings in 1Q15. We rate it BUY with TP of Bt7.5/share (based on 21x PE).