Asia Aviation

Asia Aviation Plc (AAV) 

 

Investment thesis

Last week, we accompanied Chief Executive Tassapon Bijleveld on a non-deal roadshow to local fund managers. In all, we sensed that the investors we met were no longer concerned about the impact of the Bangkok bombings in August; but were now looking ahead to AAV’s future growth prospects. In our view, the anticipation of strong earnings growth momentum during Thai tourism’s high season in 4Q15-1Q16 should be a share price catalyst. Valuation-wise, the stock trades at a YE16 PER of only 11.9x, a deep discount to the valuation (PER of 23x) under which it traded during the political unrest and coup in 2014. The key takeaways were as follows:    

Fourth-quarter high season to prevail    

Management reaffirmed that the bombings on 17 August had minimal impact on Thai Air Asia (TAA)’s air traffic numbers—only 1% of Chinese passengers postponed their reservations, while only 3% of group bookings had cancelled by the end of one week after the bombings. TAA’s air traffic has already resumed normal level currently. Meanwhile, its 4Q15 load factor is expected to rise to 83% from 79% in 4Q14 and 82% in 3Q15. Management also cited that the fourth quarter of each calendar year is normally the peak period for TAA traffic as well as its core earnings. Given that, management maintained the firm’s FY15 passenger target of 14.5m (up 19% YoY) with a load factor of 83% (against 80% in FY14). 

Extensive route network and fleet expansion to drive FY16 growth

TAA has continued its growth strategy of adding to flight frequency and introducing new destinations this year. The carrier added four flights and introduced four new destinations in 1H15 and will continue to expand its route network in 2H15 (see Figure 1). Apart from its existing hubs (Don Mueang, Phuket, Chiang Mai, and Krabi) in Thailand, TAA recently launched a new hub at U-Tapao International Airport (Pattaya, Chonburi) in September, which will provide service for flights along five international routes (four cities in China and one in ASEAN) and one domestic. 

Moreover, TAA will launch another hub in 2016 coupled with new destinations both domestic and international, such as Vientiane and Luang Prabang (both in Laos), and India, in the proportion of 35% domestic and 65% international. The destinations to be launched in 2016 will diversify its passenger nationality (from a 20% concentration in Chinese), and will boost the firm’s average fare, as the international routes normally command higher rates than domestic routes. To cope with its route network expansion, TAA will continue to expand its fleet by five aircraft each year, bringing the total to 50 by YE16 from 45 as of YE15 (see Figure 2), implying a capacity growth of 11% YoY. This is in line with its FY16 passenger target of 16m (up 11% YoY). 

Benefitting from low oil price environment  

Management stated that TAA should continue to benefit from the low jet fuel price next year. Note that fuel cost accounted for 38% of its operating expenses in 1H15. TAA has entered a jet fuel hedging agreement for 50% of FY15 consumption and for 8% of FY16 consumption as of now. This would imply the firm’s effective jet fuel cost for 2015 to be US$78/bbl (down 33% YoY) and US$67/bbl for 2016 (down another 14% YoY).