Asia Aviation

Asia Aviation Plc (AAV)

Investment thesis
The key messages from the analyst meeting reaffirmed our optimistic view toward AAV. The share price outperformance should sustain momentum through 2Q13, driven by strong YoY earnings growth. In addition, we think the firm’s 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.
Strong 1Q13 earnings growth
AAV posted a 1Q13 net profit of Bt397m, up 26% YoY but down 3% QoQ. Stripping out an FX gain of Bt0.4m, core profit would be Bt397m, up by 26% YoY and 1% QoQ, driven by: 1) greater air traffic (RPK rose by 20% YoY and 13% QoQ to 2,614m), 2) a higher average seat fare (up 12% YoY but down 5% QoQ to Bt1,995), 3) increased ancillary income (up 1% YoY but down 2% QoQ to Bt357 per passenger) and 4) a lower effective QoQ tax rate (to 21.1% from 22.2% in 4Q12). The QoQ declines in average seat fare and ancillary income are due to seasonality. The SG&A/sales ratio rose to 7.2% 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 momentum to be sustained through 2Q13
Even though the second-quarter is normally low season for Thai tourism and AAV (its traffic typically declines 10% QoQ), we expect the airline to post YoY earnings growth for 2Q13. The key drivers are: 1) fleet expansion, 2) greater air traffic, 3) a higher mean seat fare and 4) increased ancillary income. The fleet will expand to 29 aircraft by end-June, up from 24 at end-June 2012 and 28 at end-March 2013. The firm achieved 20% YoY passenger growth in both 2Q12 and 1Q13 and momentum should be sustained through 2Q13. The mean seat fare is expected to rise YoY and (stable QoQ) on a greater number of international flights. Ancillary income should also increase YoY. 
Strong growth prospects with scope for upside to earnings
AAV’s growth prospects are fueled by both volume and pricing. Rising flight frequency in order to serve fast-growing demand for travel combined with fleet expansion (from 24 aircraft at YE12 to 35 by YE13 and 61 by YE17) will enable substantial passenger growth for the carrier. AAV targets FY13 passenger growth of 20% YoY to 10m pax. Moreover, management guides that ancillary income will rise to Bt383/passenger by YE13 from Bt357 in 1Q13 and Bt354 in FY12, driven by new products. We conservatively assume only 3% ancillary income growth (to Bt363/pax). So the guidance represents scope for upside to our model.
There is also potential for upside to AAV’s long-term earnings profile from the launch of Air Asia X (Air Asia’s new long haul carrier; expected to debut before YE13), which will feed passengers from Europe and elsewhere to its Thai business partner.