Asia Aviation

Asia Aviation Plc   

 

We revised AAV’s core earnings up by 36% in 2016 and 14% in 2017 to reflect the 1Q16 beat. After achieving a new high in 1Q16, we believe the strong momentum from growing Thai tourism and windfall from lower jet fuel price will further support share price. AAV is our top choice in the airline segment and we BUY with a new mid-2017 TP at Bt7.5/share (up from end-2016 TP of Bt6.5/share).  

 

Strong operations continue. At Friday’s analyst meeting, the tone was positive. Operations are steadily strengthening, with QTD load factor at ~83%, beating the 81% in 2Q15, and average fare growing ~2% YoY. AAV is positioning Hat Yai airport as its sixth hub (following Don Mueang, Phuket, Chiang Mai, Krabi, U-Tapao). In 2Q-3Q16, AAV will launch eight new routes: three domestic (Hat Yai – Chiang Rai, Chiang Mai – Khon Kaen and Hat Yai – Khon Kaen) and five international (Hat Yai – Johor Bahru, Bangkok – Kochi, Bangkok – Shantou, Chiangmai – Changsha and Bangkok – Vientiane). AAV has fine-tuned its 2016 targets to 17mn passengers with 83% load factor from 16.9mn passengers and 82% load factor. 

 

Windfall from lower jet fuel cost through end-2016. Lower jet fuel cost was pivotal to AAV’s all-time high in 1Q16, as effective jet fuel cost (including hedging) was US$49/bbl, -43% YoY and -33% QoQ. We believe this windfall will continue through the end of this year. AAV has raised its hedging to 70-76% of total jet fuel usage in 2Q-4Q16, above its normal policy of 30%, with average hedging cost at US$54-55/bbl, below the US$57-61/bbl in February 2016. With this, we estimate its effective jet fuel cost at US$57/bbl in 2016, below our assumption of US$61/bbl. 

 

No comment on King Power news. Mr. Tassapon Bijleveld, AAV’s CEO, declined to comment on news that King Power, Thailand’s major duty-free operator, will acquire some AAV shares from him and his family. King Power currently operates on-board duty-free service on Thai Airasia’s international flights. He views that there is long-term potential growth for AAV and King Power to develop other business such as online duty-free, but it will take time to assess the regulatory implications.  

 

Earnings upgrade. We revised up AAV’s core earnings by 36% in 2016 and 14% in 2017 to reflect: 1) the 1Q16 beat and 2) a reduction in effective jet fuel cost to US$57/bbl in 2016 from US$61/bbl from higher hedging position and lower hedging price. After the revision, we estimate core earnings at Bt2.0bn in 2016, nearly double Bt1.2bn in 2015. This implies strong earnings growth of 52% YoY in 2Q-4Q16 after its record 1Q16.  

 

Rate BUY with new mid-2017 TP at Bt7.5/share. We maintain our BUY call on AAV with new mid-2017 TP at Bt7.5/share (up from end-2016 TP at Bt6.5/share) based on 18x PE (historical average of regional airlines), lower than the previous multiplier at 21x PE (+0.5SD historical average of regional airlines) as earnings growth will normalize in the future. AAV is our top airline pick, backed by strong earnings growth and bright prospects from growing demand to travel, particularly from China and AEC countries.