Asia Aviation

Asia Aviation Plc (AAV) 

 

The 18% plunge in jet fuel price over the past one month will materially benefit oil users like AAV. However, the market appears to be ignoring the earnings upside from this: AAV’s share price has been flat in the same period. Backed by exuberant Thai tourism, AAV’s earnings are on the way to record highs in 2015 and continued growth of 12% in 2016. We rate BUY on AAV with TP of Bt7/share.   

Windfall from falling jet fuel price. Over the past one month, jet fuel prices have fallen a steep 18%. QTD average jet fuel price is US$56/bbl (-39% YoY and -8% QoQ) and spot price is lower at US$46/bbl. AAV is basking in this climate, since jet fuel is its major cost component at 36% of total operating cost. The company reports it has hedged 50% of total jet fuel usage in 4Q15 (at a cost of US$88/bbl) and 30% in 2016 (at a cost of US$66/bbl). This means the windfall will show up in 4Q15 and be significant in 1Q16. If QTD average jet fuel price at US$56/bbl stays on through 2016 (vs. our assumption of US$74/bbl) and assuming other factors are unchanged, we see large earnings upside in 2016 of ~40% for AAV 

Strong high season in 4Q15-1Q16. AAV’s load factor during October–November was strong at 82-83%, beating the 81% in 4Q14, despite the 21% jump in capacity in terms of Average Seat Kilometers (ASK). On the fare side, AAV guided to strong momentum from 3Q15 so far in 4Q15, boosted by robust international routes and less fare pressure on domestic routes. We believe AAV’s strong operations will continue in 1Q16 as it is seeing YoY growth in forward bookings for its China routes for January–February (China’s Golden Week is February 7-13).  

India is key focus in 2016. In 2016, AAV will focus its expansion on international markets, with India in the spotlight as India is #2 in the world in terms of population and disposable income is growing. AAV’s second route to India, Bangkok–Bangalore, began in September and response has been so good that it is already profitable. For the longer term, AAV expects revenue from India will increase to ~15% of total revenue (from 2% currently), balancing revenue from China, now at ~20-25% of total revenue. 

Positives not priced in. BUY at TP of Bt7/share. AAV’s share price has been flat over the past month implying the market has not priced in the potential earnings upside from the fall in jet fuel price. Its earnings uptrend is another positive that has yet to be priced in, as we expect AAV’s core earnings to be the highest ever at Bt1.5bn in 2015, growing to Bt1.7bn in 2016 (+12% YoY) backed by strong Thai tourism. We maintain BUY on AAV with end-2016 TP of Bt7/share.