Asia Aviation

Asia Aviation Plc (AAV)

Above estimates: AAV posted a 2Q12 net profit of Bt14,816m, up by 90-fold YoY and 46-fold QoQ. Stripping out a gain on fair value of previously held equity interests of Bt14,690m and an FX gain of Bt43m, 2Q12 core profit would be Bt84m, down by 36% YoY and 73% QoQ. The result was significantly above our estimate and the consensus, due to the extra gains.
Results highlights: The strong YoY revenue growth was driven by a 20% rise in passengers carried, an improved loading factor (to 79% from 78% in 2Q11) and fleet expansion (to 24 aircraft from 20 in 2Q11). Moreover, AAV’s accounting method change to full consolidation (from 4 May 2012) from 51% proportionate consolidation in 2Q11 contributed to revenue growth, both YoY and QoQ. Excluding the accounting change effect, revenue contracted QoQ, due to seasonality—passengers carried fell 9% QoQ and ancillary income dropped 20% QoQ.
The key factors behind the core profit contraction were: 1) higher fuel consumption (up 19% YoY), due to a larger fleet and flight delays caused by a runway closure at Suvarnabhumi Airport, 2) higher rental and maintenance costs with a larger fleet and 3) the firm started paying tax in 2Q12. But AAV has already repaid its loans, so its interest expenses dived YoY, which supported earnings. It currently has a net-cash position.
Outlook: AAV’s 3Q12 core earnings are expected to rise YoY, driven by air traffic, greater ancillary income, lower fuel costs (the jet fuel price has dropped to $126/bbl) and reduced interest expenses. But we expect core profit to soften QoQ, as the third-quarter is normally Thai Air Asia’s lowest season. Nevertheless, the normalization of ancillary income should support 3Q12 earnings—the discount in unit price for baggage handling fees returned to normal on June 26, 2012. AAV should resume strong earnings growth in 4Q12, driven by tourism peak season.
What’s changed? While we maintain our FY12 core profit forecast at Bt1,329m, we have revised up our FY12 net earnings projection to Bt16,179m (from Bt1,489m) to reflect the extra gains booked in 2Q12. 
Recommendation: We like AAV for its strong earnings growth profile—a 31% CAGR, FY11-14, against 12% for the SET. The current tourism low season may weaken short-term sentiment toward the stock, but we expect interest to rebuild in the approach to tourism high season, which starts in 4Q12.AAV currently trades at an FY12 core PER of 13x, a 10% premium to its peer mean of 11.8x, and a YE12 EV/EBITDA of 6.9x, similar its peers. We think the stock should trade at least on a par with its peers, given its stronger EBITDA and net profit growth.