Asia Aviation

Asia Aviation Plc (AAV) 

 

AAV’s share price has rallied strongly to a 12-month high as investors begin to factor in the positives from the recovery of Thai tourism and the bounce back in profit in 4Q14. We expect a continued surge in share price as the windfall from the steeply lower jet fuel price becomes more apparent in 1Q15 to all-time high earnings of ~Bt600mn. We recommend investors get into AAV, an oil crash winner. We BUY with a TP of Bt7.5/share (21x PE, +0.5SD historical regional airline average). 

Thai tourism recovery with accelerating growth. In 4Q14, after politics stabilized, Thailand’s international tourist arrivals achieved a record high of 7.5mn, up 7% YoY and 28% QoQ, the first quarter of positive YoY growth after falling YoY for three quarters. In Jan, tourist arrivals were 2.7mn, up 16% YoY, and Chinese tourists, supplying the largest at 21% of total arrivals, hit a record high of 560K, up 57% YoY. While the official data has not been released, Thai tourism is growing at a faster pace, as AOT’s international passengers grew 25% YoY in Feb (vs. 14% YoY in Jan) since the Chinese generally do most of their travelling during the Chinese New Year. Through 3Q15, we expect positive surprises from industry statistics with accelerating YoY growth in tourist arrivals driven by a strong low season, mainly from short-haul destinations such as China, and off a low base as Thai tourism was spiraling down with negative YoY growth in Jan–Sep 14.  

More payoff from falling oil price in 1Q15. The bonus from the plunge in oil price was not much of a factor in AAV’s earnings turnaround in 4Q14 but should be quite apparent in 1Q15. AAV’s fuel cost/ASK in 4Q14 was Bt0.72, down 4% YoY but relatively flat QoQ at the same time that average jet fuel spot price fell 25% YoY and 20% QoQ. The lower decline in fuel cost/ASK against spot price reflects AAV’s earlier hedging at a higher price. Since Dec last year, AAV reduced its hedging position to 10-15% and in Feb raised this again to 50% of usage in 1H15 at an average price of US$88/bbl. So far, QTD, average jet fuel spot price (including fees) continues to fall, to US$74/bbl, down 42% YoY and 24% QoQ. Given the lower hedging position, we estimate AAV’s fuel cost/ASK in 1Q15 will shrink to Bt0.62, down 18% YoY and 14% QoQ. Assuming other factors are constant from 4Q14, our assessment shows the windfall from plunging oil price will lower fuel costs by ~Bt440mn, adding ~Bt190mn to AAV’s 1Q15 core profit. 

Stronger upswing with record high in 1Q15. AAV is doing well off the uptrend in Thai tourism with a high load factor of ~82% in January-February. With the positives from higher revenue from more passengers flying at a higher average fare and the windfall from the fall in jet fuel price, we expect 1Q15 to be a record with core profit of ~Bt600mn. We keep our 2015 core earnings forecast at Bt1.8bn, a V-shaped recovery from 2014’s Bt114mn. 

Maintain BUY on AAV. AAV’s share price has rallied strongly to a 12-month high and it is trading at 16x 15PE, above the regional airline average. Despite this, we expect a further increase, backed by a clearer earnings upswing as the windfall from the oil price crash becomes more apparent in earnings. Given SCBS view on further weakening in oil price through 1H15, we recommend investors get into AAV, an oil crash winner. We rate AAV as BUY with TP of Bt7.5/share.