Asia Aviation

Asia Aviation Plc (AAV) 

from a six-month low. However, we see fundamental backing for further increases from the recovery of Thai tourism, earnings upgrades (+26% in 2015 and +8% in 2016) and potential upside from continued falls in jet fuel price. We expect AAV’s earnings to hit a record high of Bt1.8bn in 2015, almost double the 2013 peak. We BUY with a new end-2015 TP of Bt7.5/share (up from Bt7.0/share) based on 21x PE.  

 

Record high tourist arrivals in Dec 2013. In December 2013, Thailand’s international tourist arrivals achieved a record high 2.8mn, up 12% YoY and 17% MoM. The main growth driver was China, at 19% supplying the greatest number of tourists by country: 495K of the visitors arrived from China, a surge of 87% YoY in December. The momentum is continuing, with 12% YoY growth in international tourist arrivals during January 1-18, 2015. This reaffirms that Thai tourism is heading back up and we expect international tourist arrivals at 30.2mn, up 22% YoY, with 6.2mn from China, up 34% YoY from 4.6mn, making it a major source of tourists. AAV is ideally positioned to benefit as it derives 20% of its revenues from passengers from China. 

 

Falling jet fuel price. At 44% of operating cost, jet fuel is a major expense. Global oil prices began plummeting in 4Q14 and have yet to find their bottom. QTD average jet fuel spot price is US$64/bbl, down 30% from the 4Q14 average of US$92/bbl. Management notes AAV has hedged 15% of total jet fuel usage in 1H15. Therefore, we believe the plus will show up significantly in 1Q15 earnings. In response to the fall in jet fuel price, AAV plans to cut ThaiAirAsia’s fuel surcharge for all international routes from February. (The fuel charge is supposed to rise or fall in line with movements in fuel prices.) We estimate fuel surcharge accounts for 7% of AAV’s total revenues.  

 

Raise 2015F by 26%. We raise AAV’s core earnings by 26% in 2015 and 8% in 2016 to factor in: 1) average jet fuel price of US$82/bbl (based on Brent oil price at US$62/bbl and Dubai oil price at US$60/bbl) in 2015 and US$92/bbl (based on Brent oil price at US$72/bbl and Dubai oil price at US$70/bbl) in 2016, down from US$120/bbl and 2) a cut in fuel surcharge. We see the reduction in fuel surcharge as unlikely to damage AAV’s operations, as it will inspire more travelers, igniting demand and boosting passengers at the same time that the lower fuel cost will offset the reduction in fuel surcharge revenue. Our sensitivity analysis suggests a US$10/bbl fall in jet fuel price from our 2015 assumption will increase AAV’s core earnings by 23% and vice versa. 

 

BUY with new TP of Bt7.5/share. We believe AAV’s share price has not fully factored in the positives. Since oil prices began to fall, AAV’s share price has increased by 17% from its six-month low and we see room for further increase supported by: 1) 2015-16 earnings upgrades and 2) large potential upside to earnings. If QTD average jet fuel price at US$64/bbl stays on through 2015 (vs. our assumption of US$82/bbl), we see large earnings upside in 2015 of 31% for AAV. We rate BUY with a new TP at Bt7.5/share (up from Bt7.0/share). We lower our assigned multiple to 21x PE, 0.5SD historical average of regional airlines, from 23x PE as we believe AAV’s earnings are normalizing from the exceptional low in 2014.