Asia Aviation

Asia Aviation Plc (AAV)

 

Investment thesis

In our view, the recent share price retreat has already priced in the disappointing 4Q15 earnings, which we can now put behind us. We think that the market should now focus on the expected robust earnings growth in 1Q16, buoyed by Thai tourism’s peak season and the low jet-fuel price. In addition, AAV’s current valuation is irrationally cheap, as it trades at a low season valuation.     

Expansive foreign tourist arrivals prolonged     

The expansive momentum of foreign tourist arrivals to Thailand has been prolonged in 2016. According to the Department of Tourism, the number of foreign tourists increased 15% YoY to 3m in Jan, led by Chinese tourists (up 45% YoY). Even though that YoY growth rate is lower than the 20% YoY growth posted in 2015, due to the low base set in 2014, which was brought about by political unrest and the coup, the number is higher than the five-year average of 13% during 2011-2015. In addition, the number is much stronger than the 7% YoY growth (total foreign tourists of 32m in 2016) forecast by the government agency. We think that Thai Air Asia (TAA) will benefit from greater passenger numbers and earn a higher average fare, as the ticket prices for international routes are normally higher than those of domestic routes.     

Two-year high load factor and higher fares expected for 1Q16    

Apart from the strong rebound in international passengers in 1Q16 after slow numbers in 4Q15, we expect TAA to reap benefits from problems incurred by Nok Air (NOK), both in terms of higher passenger numbers and higher domestic fares. TAA’s January load factor was 86% (up six percentage points [ppts] YoY) and reached a two-year high of 88% (up four ppts YoY) in February. We now expect that TAA’s 1Q16 load factor will climb to 86%, up three ppts YoY and four ppts QoQ. Moreover, the firm’s average fare has risen 9% QoQ to Bt1,720 per pax in 1Q16QTD, driven by both international and domestic routes.  

Lower jet-fuel price … another 1Q16 earnings booster  

Furthermore, TAA’s operating expenses are expected to decrease both YoY and QoQ in 1Q16, driven mainly by the lower jet-fuel price, which accounts for 39% of total operating expenses. That price is expected to drop 41% YoY and 29% QoQ to US$55/bbl in 1Q16. The progressing statistics for 1Q16 prompt us to be optimistic toward AAV’s 1Q16 core earnings. Our preliminary estimate is that AAV will post core profit of around Bt700m for 1Q16, up 42% YoY and almost 300% QoQ. There is scope for upside to the firm’s 1Q15 core profit forecast from a lower-than-assumed jet-fuel price, as the average spot price in 1Q16QTD is US$42/bbl, which is lower than our assumption. 

Irrationally cheap valuation  

If this strong momentum sustains throughout 1Q16, the current valuation—YE 16 PER of 11.2x—is irrationally cheap, as that is the same level at which the stock traded during the low season when the core profit softened. For instance, the stock traded at YE15 PER of 11.1-11.2x during 2Q15-3Q15 when the core profits range between Bt290-323m. Historically, the stock trades at a PER of 13-14x during the high season, which implies a share price of Bt5.70-6.10.