Asia Aviation

Asia Aviation Plc 

 

AAV’s share price fell 8% on Friday, pulled down by the unexpected miss in 4Q15. We see this as an opportunity to get into AAV as its average fare is back on track and it will see earnings jump in 1Q16. AAV is, in our view, the best play in its sector, burnished by an earnings uptrend and good potential growth from AEC. We rate BUY with new end-2016 TP of Bt6.5/share after an earnings revision (down from Bt7/share).   

 

Stronger operations, earnings to jump in 1Q16. At the analyst meeting on Friday, management reports stronger operations in the high season for Thai tourism. AAV’s passenger traffic is growing 16-20% YoY, giving it a high load factor of 85% in January and 87% in February, well on its way to achieving its target of an 85% load factor in 1Q16 (above 83% in 1Q15 and 82% in 4Q15). Average fare thus far in the quarter is back to a solid ~Bt1,720/pax, relatively flat YoY but up 9% QoQ from 4Q15’s Bt1,579/pax. On the cost side, we expect a windfall from falling jet fuel price in 1Q16 as management guides to an average jet fuel cost (including hedging) of US$51/bbl, down 40% YoY and 27% QoQ. These factors give a preliminary estimate of 1Q16 core earnings of Bt550-600mn, improving from Bt498mn in 1Q15 and Bt222mn in 4Q15, and a record high.  

 

2016 targets: AEC heads the list. AAV’s 2016 targets reflect its positive view on Thai tourism and operations: 1) 16.9mn passengers, up 14% YoY, 2) 82% load factor, 3) 3% increase in average fare and 4) five additional aircraft (to 50 by the end of 2016). Its strategy is to strengthen its network within the AEC particularly the CLMV. AAV will initiate its first flight into Laos (BKK – Luang Prabang), on March 24, closing the gap in its network in CLMV countries. AEC now accounts for 15-20% of AAV’s revenue, with ~8% from CLMV; the company targets revenue contribution from AEC to reach 27% in the future to balance the China market, which contributes ~20-25%.  

 

Earnings revision. We revise down AAV’s core earnings by 10% in 2016 and 7% in 2017. Our key assumption changes are: 1) (+) lower jet fuel price to US$57/bbl in 2016 (from US$74/bbl) and US$62/bbl in 2017 (from US$79/bbl), 2) (-) weaker baht at Bt36/US$ (from Bt35/US$) in 2016 and 3) (-) lower average fare to Bt1,750/pax in 2016 (from Bt1,830/pax). Our new average fare implies 5% YoY growth, above company guidance of 3%; the strongest growth will be in 4Q16 off the low base. After the earnings revision, we expect AAV’s core earnings to be a record high of Bt1.5bn in 2016, up 27% YoY.  

 

Fall in share price is an opportunity to buy. AAV’s share price fell 8% on Friday after the unexpected miss in 4Q15 from the fall in average fare. However, in our view this is a good time to buy the stock for an earnings jump in 1Q16 and record high earnings in 2016. Within the airline sector, we like AAV the best, on an earnings uptrend and potential growth from growing demand to travel in AEC and CLMV markets. We rate BUY with new end-2016 TP at Bt6.5/share based on 21x PE, +0.5SD historical average of regional airlines (down from Bt7.0/share).