Asia Aviation

Asia Aviation Plc (AAV)

 

AAV stands out as the airline sector’s best choice amid the industry-wide clouds from the SSC flag and more inspections: the impact on AAV itself is negligible as continued expansion into China is confirmed. High tourist influx and low jet fuel price will boost AAV’s 2Q15 core earnings to Bt300mn from a deep loss of Bt199mn in 2Q14. Although share price has come back up 13% from a recent low, risk/reward is attractive since share price is still 18% below peak and trading at 1.1x 15PB or -1.0SD of its historical average of 1.3x. We maintain BUY with TP of Bt7.5. 

Route expansion continues. Clouds have hovered over the Thai airline industry after the International Civil Aviation Organization (ICAO) placed Thailand on its list of countries with Significant Safety Concerns (SSC). AAV, however, will be able to fly above these clouds as it can continue expansion - particularly in a growth market like China (~20% of AAV’s revenue). China recently gave AAV the nod to routes to three new cities in China and, in 4Q15, AAV plans to launch four new routes to China: two from Don Muaeng airport and two from U-Tapao airport in Rayong. The government is hoping to make U-Tapao airport into a commercial airport serving more travelers, particularly international passengers wanting to visit Pattaya, which is only ~45 km from U-Tapao airport. To this end, the government is expanding U-Tapao airport to lift passenger capacity from 870K/year to 3mn/year in 2016 and to 5mn/year in 2020. 

high load factor for China routes. There is a concern that the flood of Chinese tourists into Thailand will slow after the rout in the Chinese stock market. However, AAV reports that it continues to see a strong influx of passengers from China, with forward bookings still high in August. This coincides with ERW’s guidance to strong booking momentum from China. We continue to expect expanding growth in Chinese tourists, now key to Thai tourism, as the proportion of outbound travelers from China to its total population is still low at 7% vs. the world average of 17%.  

2Q15F preview. We estimate core profit of Bt300mn, up from a Bt199mn loss in 2Q14. Behind this is: 1) 3.5mn passengers (+26% YoY but -5% QoQ), 2) load factor of 81% (vs. 78% in 2Q14 and 83% in 1Q15), 3) average fare of Bt1,645/pax (+2% YoY but -6% QoQ), and 4) average jet fuel spot price at US$80/bbl (-36% YoY but +8% QoQ). The weakening of the baht to the US$ (-2% QoQ) and AAV’s foreign debt exposure will bring an estimated Bt55mn FX loss leaving AAV with 2Q15 net profit of Bt245mn.  

Maintain BUY at TP of Bt7.5/share. We see AAV as the best choice of all Thai airlines with a healthier earnings outlook. Although AAV’s share price has rebounded by 13% from its recent low, we see the risk/reward as attractive, since AAV’s share price is still 18% below its peak and is trading at 1.1x 15PB or nearly -1.0SD of its historical average of 1.3x. We maintain BUY on AAV at TP of Bt7.5/share. There could be earnings upside if jet fuel price is lower than now expected: a 1% fall in jet fuel price from our US$82/bbl in 2015 and US$92/bbl in 2016 raises our forecast by 1%. Any downside to earnings would come from a further weakening in the baht against the US$: a depreciation of 1% from our Bt33/US$ in 2015-16 cuts forecast by 2.5%.