Asia Aviation

Asia Aviation Plc (BH)

Earnings in line with our estimate
AAV reported a 3Q13 net profit of Bt158m, up 47% YoY but down 40% QoQ. Stripping out an FX gain of Bt37m, core earnings would be Bt121m, up 19% YoY but down 9% QoQ. The results were in line with our estimates and the consensus.
Results highlights
The core profit drivers were: 1) fleet expansion, 2) greater air traffic and 3) higher ancillary income (despite a lower average seat fare and higher SG&A expenses).
AAV’s fleet expanded to 31 aircraft as of end-Sept from 25 at Sept 2012 and 29 at end-June 2013. The number of passengers in 3Q13 increased by 30% YoY and 6% QoQ to 2.6m, while the loading factor rose to 83% from 82% in both 3Q12 and 2Q13. Ancillary income increased by 1% YoY and 3% QoQ to Bt346/passenger. However, intense competition in the domestic market resulted in: 1) a lower mean seat fare (down by 4% YoY and 2% QoQ to Bt1,842) and 2) higher SG&A expenses—the SG&A/sales ratio was 7.6%, up from 6.8% in 3Q12 and 6.1% in 2Q13.
Outlook
The fourth-quarter is normally the start of high season for Thai tourism. AAV’s passenger numbers usually jump about 16% QoQ in that period. Moreover, its fleet will expand to 35 aircraft by year-end. Even though capacity will rise YoY, the loading factor is expected to be sustained at about 83% in 4Q13, supported by seasonality, increased flight frequencies and new destinations. In addition, ancillary income should rise QoQ, driven by the launch of a new ancillary product—Fly Thru. However, SG&A expenses are expected to increase YoY, due to a heavy marketing campaign for the domestic market. As such, AAV’s 4Q13 core profit is likely to rise QoQ, but be flat YoY. 
What’s changed?
Even though 9M13 core earnings represent only 68% of our FY13 forecast of Bt1,214m, we maintain our model unchanged, as 4Q13 numbers are expected to rise significantly QoQ. 
Recommendation
Anticipation of solid QoQ core earnings growth in 4Q13 will catalyze the share price in the near-term, we expect. Furthermore, AAV’s hefty core profit expansion profile—an FY13-15 CAGR of 46% against 8% for the SET—will make for long-term price upside. The stock currently trades at an FY14 PEG ratio of 0.3x, a discount to the regional low-cost carrier mean of 0.5x. Given its superior profit growth profile, we think AAV deserves to trade at a premium to Asian peers.