Asia Aviation

Asia Aviation Plc (AAV) 

Investment thesis

AOT’s share price rose has risen 21% since our latest upgrade in November 2014. We think the current share price—which trades at a forward PEG ratio of 2.1x, a premium to the regional average of 1.7x—has already priced in the expectations of strong earnings growth through to March 2015, buoyed by the tourism high season and a broad recovery in visitor arrivals. Moreover, there will be no short-term catalyst for the share price, as the low season for Thai tourism during April-September is approaching. However, there is a potential for an upside to our FY15 earnings forecast from higher-than-expected passenger growth. We have therefore downgraded our rating for AOT to HOLD from BUY.   

Strong earnings growth expected for 1Q15 (Oct-Dec 2014)

We expect AOT to post a 1Q15 (Oct-Dec 2014) net profit of Bt3,918m, up 4% YoY and 72% QoQ. Stripping out an assumed FX gain of Bt160m, 1Q15 core profit would be Bt3,758m, up 1% YoY and 78% QoQ. The drivers of the core earnings growth were: 1) greater passenger numbers (YoY & QoQ), 2) higher aircraft movement (YoY & QoQ), 3) lower operating expenses (QoQ), 4) lower personnel expenses (QoQ) and 4) lower interest expenses (YoY & QoQ).

AOT’s total passenger numbers for 1Q15 increased 13% YoY and 21% QoQ to 25.9m, while total aircraft movements rose 9% YoY and 18% QoQ to 170,953 flights. Concession revenue is also expected to increase both YoY and QoQ in tandem with a rebound in international passenger numbers (up 9% YoY and 26% QoQ to 15.3m in 1Q15).    

Traffic expansion to push more 2Q15 earnings growth (Jan-Mar)  

As the Thai tourism high season normally lasts through the first quarter of each calendar year and demand for air travel to and within Thailand has broadly improved, we therefore expect foreign visitor arrivals and AOT’s passenger numbers to increase further in the Jan-Mar quarter (2Q15), YoY and QoQ. Air traffic numbers have continued to improve in 1Q15 to date—AOT statistics for January 2015 expanded further—total passenger numbers rose 18% YoY (2% MoM) compared to the 16% YoY growth seen in December 2014 and a 3% YoY growth in FY14. This led AOT’s 4M15 passenger numbers to expand 14% YoY. 

Moreover, international passenger numbers posted strong YoY growth of 14% for the period against the 12% YoY growth rate in December 2014 and the 6% YoY contraction in FY14. More international passengers would mean greater passenger service charges and higher concession revenue for AOT. Historical data suggested that AOT’s passenger numbers for the Jan-Mar quarter normally increased by 8% QoQ. We, therefore, expect YoY and QoQ core earnings growth for the Jan-Mar quarter (2Q15).