Asia Aviation

Asia Aviation Plc (AAV) 

 

AAV is our top pick in the airline sector. Thai tourism is revving up and the all-time high for tourist arrivals at 33mn in 2016 will boost core earnings to climb to another record at Bt1.7bn. AAV’s average fare - a key for earnings growth - is rising on its high revenue exposure to the strong international market with a plus from AEC implementation. Despite a 9% increase over the past three months, AAV’s share price is still trading at 1.0x 16PB, close to its trough in 2014 when political unrest dragged earnings into the red. BUY with TP of Bt7/share. 

 

Thai tourism heading up. AEC is a plus. In 10M15, 24.3mn international tourists came to Thailand, up 24% YoY, and we expect this to end the year at a record high of 30mn (+22% YoY) and rise again to 33mn in 2016 (+10% YoY). China will continue to supply the bulk of the tourists – at 27% of total arrivals - and is the key market for Thai tourism. We expect 8.0mn tourists from China in 2015 (+73% YoY) and 9.5mn in 2016 (+19% YoY). The startup of the ASEAN Economic Community (AEC) in December 2015 will be positive for Thai tourism given the large population of over 600mn, greater connectivity and growing economies that encourage more travel among the ten participating countries. 

 

Airfares rising, key for earnings growth. AAV benefits strongly from the growing Thai tourism given the high portion of revenue from international routes at ~60% of total revenue. By market, China is the largest at 20-25% of total revenue followed by AEC at 15-20%. Not only does the international market provide more passengers, it also helps boost AAV’s average fare and dilute the impact from domestic competition. We estimate 2% YoY growth in AAV’s average fare in 2015 and 4% in 2016. Our sensitivity analysis in Figure 6 suggests AAV’s core earnings are very sensitive to fare change and a 1% rise in fare from our assumption will raise 2016 core earnings by 8%.  

 

Core earnings hit record high. We estimate AAV to deliver record high core earnings at Bt1.5bn in 2015 and continue to grow 12% YoY to Bt1.7bn in 2016 in backs of 2016 assumptions including; 1) 16.5mn passengers carried (+10% YoY), 2) 4% increase of average fare, 3) average Bt35/US$ and 4) average jet fuel price at US$74/bbl. Currently, AAV has hedged 24% of total jet fuel usage in 2016 at the price of US$66/bbl. 

 

Best in the sector. BUY at end-2016 TP of Bt7/share. We see AAV as the best of all the airlines, in the black and growing. Despite this, AAV is trading at 1.0x 16PB, close to its trough in 2014 when political unrest dragged earnings into the red. Compared to other tourism plays that reported stronger earnings in 9M15, AAV is a laggard play since its share price has increased by 9% over the past three months vs. +35% for MINT, +30% for CENTEL, +14% for AOT and +12% for ERW. We maintain BUY on AAV with end-2016 TP of Bt7/share based on 21x PE, +0.5SD of historical average of regional peers.