Asia Aviation

Asia Aviation Plc (AAV)

 

AAV called a meeting yesterday at which management expressed its confidence in the strength of AAV’s operations, with only limited impact from SSC labeling. It is standing firm on this year’s ambitious targets. Amid the gloom in the industry, a bright spot is lit by China – AAV’s key market - which has given the nod for three new routes for AAV from 4Q15, proof that its qualifications meet China’s standards.  

 

Limited impact from SSC status… CEO Mr. Tassapon Bijlevel expects more inspections on Thai-flagged carriers by markets such as the U.S., Europe, Australia, Japan and South Korea after Thailand was placed on the International Civil Aviation Organization (ICAO)’s list of countries with “significant safety concerns” (SSC). If these countries are not satisfied with the safety standards, they can take serious action that can include banning. However, AAV does not expect this to happen and in any case, since it does not serve those markets, operations will be affected little. It stands by its 2015 targets of 14.5mn passengers (up 19% YoY) and 83% load factor (80% in 2014). 

 

…and TAAX’s Sapporo route halt. On August 1, Thai AirAsia X (TAAX) will suspend the Bangkok-Sapporo route (introduced in May) and will not fly this route again until the ICAO issues are resolved in such a way that Japan’s doors are wide open for TAAX to operate regular services. However, it will continue its scheduled flights to Tokyo, Osaka and Incheon. AAV is unaffected financially by the cessation of the Sapporo route impact as it has no holding in TAAX. There may be some operational impact as ~2% of Thai AirAsia’s passengers are pass-through from TAAX but as this is still a new route, we expect the effect to be small.  

 

Good news: Three new China routes approved. What is crucial for AAV’s growth is action by China, since China is its key market at ~20% of AAV’s revenue. The good news here is that China recently gave the nod to routes to three new cities in China, expected to start in 4Q15. This confirms that China has never blocked airlines from countries that fail an ICAO audit and that Thai carriers will be able to continue flying in China as normal if their qualifications meet China’s standards. To underscore its high standards, AAV is in the process of voluntary certification by IATA Operational Safety Audit (IOSA), the global standard for safety and industry best practices.  

 

No impact from AirAsia Berhad concerns. In response to concerns about AirAsia Berhad (which holds 45% in Thai AirAsia) operations and accounting transparency, Mr. Tassapon reports continued improvement in AirAsia Berhad’s operations and assures investors of the integrity of published financial statements. There will be no operational impact on Thai AirAsia or on AAV’s earnings.  

 

ST negative but seems priced in. Maintain BUY. Concerns about more inspections will pressure the airline sector in the near term. At the same time, the impact on AAV itself is negligible. AAV is our top pick (TP at Bt7.5/share) with record-high earnings this year backed by the recovery of Thai tourism and falling jet fuel price. Valuation is attractive as the share price has plummeted by 27% from its recent peak in March and is trading near a five-month low at 1.0x 15PB, -1.0SD of its historical average at 1.3x.