Asia Aviation

Investment thesis

AAV’s weakest quarter is now behind us and the market has already priced it in, we believe. Moreover, QoQ earnings growth in 4Q14-1Q15 and expectations of a sharp rebound in air traffic growth next year should boost the share price going forward. We expect soft FY14 numbers to be followed by a strong earnings CAGR of 33%, FY14-16. The stock trades at an FY15 PEG ratio of 0.1x, a discount to the regional LCC mean of 0.2x.    

Earnings to bottom out in 3Q14    

We expect AAV to post a 3Q14 net loss of Bt188m, a reversal from the net profit reported for 3Q13 and deeper into the red QoQ. The key reason behind the weaker bottom-line was heavy tax expenses tied to recognition of a deferred tax liability for three new aircraft. Note that 3Q14 operational numbers should have improved both YoY and QoQ. 

Thai Air Asia’s (TAA) total passenger numbers are expected to post an increase of 15% YoY and 5% QoQ to 2.9m people. In addition, the load factor is assumed to have risen to 82% from 78% in 2Q14 (but down slightly from 83% in 3Q13). Ancillary income is expected at Bt364/pax, up by 5% YoY and 7% QoQ, driven by the introduction of new services. Moreover, the lower jet fuel price (down by 2% YoY and 1% QoQ) to US$119/bbl would have supported the 3Q14 operational improvement. However, the 3Q14 mean seat fare probably declined by 13% YoY and 1% QoQ, due to intense competition in the domestic market.

Strong earnings turnaround expected for 4Q14 on high season

As it is now tourism high season, we expect foreign visitor arrivals and TAA’s passenger numbers to rise further in 4Q14, both YoY and QoQ, driven by a better political climate and seasonality.  

There has been a clear improvement in 4Q14-to-date—AOT statistics for October 1-21 confirm the recovery—passenger numbers increased by 11% YoY against 2% YoY slippage in Sept. More interestingly, international passenger numbers posted YoY growth of 1% for the period (the first YoY growth in 10 months). Note that political confrontation in Thailand didn’t intensify till late November 2013, so the October number represents a YoY rise on normal arrivals. An increase in international passengers would mean average seat fare and ancillary income growth for TAA. We, therefore, expect AAV’s 4Q14 core operation to turn around QoQ to profit and rise in YoY terms.

Heavy tax expenses prompted FY14 earnings forecast cut

While our ancillary income assumption rises 2% to Bt360/pax, our model now assumes much higher tax expenses tied to the aforementioned deferred tax liability. As such, we have slashed our FY14 net profit forecast by 34% to Bt136m.