Asia Aviation

Asia Aviation Plc (AAV)

Investment thesis
AAV’s share price outperformance should sustain momentum through 2Q13, driven by strong YoY earnings growth. In addition, we think its hefty core profit growth profile—an FY13-15 CAGR of 37% against 8% for the SET—will maintain share price expansion going forward. The stock currently trades at an FY13 PEG ratio of only 0.27x, a discount to the regional low-cost carrier mean. Given its superior profit growth profile, we think AAV deserves to trade at a premium to regional peers. 
Expect strong YoY earnings growth for 1Q13
We model for a 1Q13 net profit of Bt423m, up by 34% YoY and 4% QoQ. Stripping out an expected FX gain of Bt16m, 1Q13 core earnings should post a rise of 29% YoY and 3% QoQ to Bt407m, driven by: 1) greater air traffic, 2) a higher average seat fare and 3) increased ancillary income.
AAV’s RPK rose by 20% YoY and 13% QoQ to 2,614m. The average seat fare is expected to have risen 4% YoY (but softened 6% QoQ) to Bt1,983, fueled by tourism high season. Also, 1Q13 ancillary income should have inched up YoY (but declined 3% QoQ) to Bt355 per passenger. The assumed QoQ decline in average seat fare and ancillary income is due to seasonality. An SG&A/sales ratio of 6.7% is expected, up from 6.4% in 1Q12 and 4.7% in 4Q12, due to the booking of the brand license fee, starting 1Q13, and additional advertising expenses.
YoY earnings growth to be sustain through 2Q13, but ...
Even though the second-quarter is normally low season for Thai tourism, we expect AAV to post YoY earnings growth for 2Q13. The key drivers are: 1) fleet expansion, 2) higher air traffic, 3) a greater mean seat fare, and 4) better ancillary income. The fleet expanded to 28 aircraft as of end-March, up from 24 at end-March 2012. The number passengers carried is anticipated to increase in tandem with capacity growth. Note also that the average seat fare is likely to rise YoY because of a greater number of international flights. Moreover, ancillary income is expected to post a YoY increase, driven by the normalization of baggage fees.
…earnings to decline QoQ with low season
Despite expected YoY earnings growth, AAV’s 2Q13 core profit will fall QoQ, due to low season. Historical data indicate that Thai AirAsia’s traffic normally declines by about 7% QoQ during that quarter. We think, however, that there is scope for upside to 2Q13 earnings from a lower jet fuel cost in tandem with weaker crude prices and the launch of new ancillary products, such as Supersized Baggage, Pre-order Meals, Pick-A-Seat, and AA Insure in mid 2Q13, which should boost ancillary income further.