Asia Aviation

Asia Aviation Plc (AAV)

Investment thesis
The key messages at the analyst meeting reaffirmed our optimistic view toward AAV. Expanded expectations for 3Q13 earnings should catalyze the stock in the near-term. Moreover, we think that the share price will re-rate further later this year as tourism high season approaches (earnings will jump in 4Q13). The stock currently trades at an FY13 PEG ratio of only 0.34x, a discount to the regional low-cost carrier mean of 0.51x.
Strong YoY core earnings growth for 2Q13
AAV reported a 2Q13 net profit of Bt265m, down by 98% YoY (due to an extra gain booked in 2Q12) and 33% QoQ (seasonality), but a core profit of Bt133m, up 59% YoY but down 67% QoQ. The drivers of the YoY core profit expansion were: 1) fleet expansion (29 aircraft against 24 in 2Q12), 2) greater passenger numbers (up 25% YoY to 2.4m people) and 3) higher ancillary income (up 8% YoY to Bt335/pax). The QoQ core profit contraction was seasonal: 1) weaker air traffic (down 5% QoQ), 2) a lower mean seat fare (down 6% QoQ) and 3) lower ancillary income (down 6% QoQ).
Better outlook for 3Q13 earnings
Even though the third-quarter is also low season for Thai tourism, AAV’s 3Q13 earnings are likely to post a QoQ improvement, driven by fleet expansion, greater flight frequency, new destinations (mostly international routes which have higher seat fares) and increased ancillary income. We also expect AAV to post YoY profit growth for 3Q13, driven by fleet expansion, greater air traffic, and increased ancillary income. The firm’s fleet has increased to 30 aircraft. Despite capacity additions, the load factor is expected to be sustained strong at 82% (flattish YoY and QoQ) in 3Q13. 
Swift domestic market expansion - short-term pain, long-term gain 
AAV's key strategy for this year is to acquire as many good domestic flight slots as possible. This strategy may limit the upside to domestic seat fares, but will help reduce competition from newcomers. In our view, this strategy may cause short-term pain, but will create long-term gains for the firm. As the mean domestic seat fare is now expected to remain flat YoY in FY13, we have revised down our seat fare assumption by 4% to Bt1,938 per passenger, so have downgraded our FY13 net profit forecast by 12% to Bt1,323m. Our new YE13 target price is Bt6.50 (down from Bt6.80), pegged to the weighted regional low-cost carrier mean PEG of 0.5x and EV/EBITDA of 9x.
Scope for earnings upside from Thai Air Asia X
Thai Air Asia X is envisaged as a low-cost carrier that will fly mid-haul routes of 6-8 hours. It has been granted an airline license; commercial operations are scheduled to commence on January 14. Thai Air Asia X will complement AAV’s operation, as it will feed passengers to AAV flights. Note that Thai Air Asia X will not operate any of the same routes as AAV.