Remaining One Step Ahead. Short-Term Rec.: Accumulate Current Price*: AED 1.05 Long-Term Rec. : Buy LT Fair Value : AED 1.52

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1 Remaining One Step Ahead Short-Term Rec.: Accumulate Current Price*: AED 1.05 Long-Term Rec. : Buy LT Fair Value : AED 1.52 CONTENTS I. AVIATION INDUSTRY HIGHLIGHTS 2 II. CHANGES TO ESTIMATES 7 III. VALUATION 10 IV. FINANCIAL STATEMENTS 12 New Oil Price Assumptions Leading to Downgrades in Earnings: Our 2009e and 2010e forecasts now reflect our new in-house oil price forecasts of USD60 per barrel (p/b) and USD70 p/b in FY2009e and FY2010e respectively. We increased our average fuel cost assumptions for Air Arabia to USD57.5/T in FY 2009e and USD70/T in FY2010e. This has increased revenue forecasts for this year and next by 3.6% and 1.6% respectively, on the basis of higher average fare assumptions. However, the resultant pressure on margins from these higher fuel cost assumptions has led to marginally lower earnings estimates, falling by 2% in 2009e to AED502.5 million and by 4.4% in 2010e. Region Still Exhibiting Growth: While the global aviation industry continues to suffer owing to the economic downturn, the Middle East is fairing more resiliently than both the industry and emerging markets peers. Passenger traffic in the Middle East continues to grow, however given the level of additional capacity being added in the region, load factors, although improving, are still below that of Europe and North America. Strong Performer Undaunted by Increased Competition: We believe Air Arabia's robust business model, operational strengths and first mover advantage enables it to withstand competition at home. Although the UAE aviation sector has witnessed the entrance of new low cost carriers (LCC), such as FlyDubai and Air Asia, together with existing conventional carriers offering aggressive discounting, we don't believe this will have a material impact on Air Arabia's market share. Moreover, its price differential (lower prices) compared to conventional carriers still remains wide. Reiterate Positive Recommendations: Our new fuel price and average fare assumptions have had a limited impact on our forecasts, with our DCF now suggesting a fair value of AED1.52 per share (down from AED1.53). This new fair value still offers a considerable upside of 45% above the current share price, and we therefore reiterate our ST Accumulate recommendation. Indeed, stripping out the company s current cash from its market cap, Air Arabia trades on what we believe is an unjustified P/E of 4.3x 2009e earnings. Our LT Buy recommendation is based on our view that Air Arabia is well positioned to become a leading carrier in the region given: i) an under-penetrated low cost carrier market, ii) operational strengths and practices which will help to mitigate the impact of competition and iii) further potential upside from the success of its existing and additional hubs/acquisitions. COMPANY NOTE Abid Riaz ariaz@efg-hermes.com Nadine Hassouna nhassouna@efg-hermes.com KINDLY REFER TO THE IMPORTANT DISCLOSURES AND DISCLAIMERS ON BACK PAGE December Year End 2008a 2009e 2010e 2011e Avg. Number of Planes Load Factor 85.0% 80.0% 79.5% 79.0% Revenues 2,066 1,984 2,307 2,598 % Growth 72% -4% 16% 13% EBITDA Operating Profit Net Attrib. Income EPS DPS Net Debt (Cash) (3,290) (2,844) (2,635) (2,414) P/E (Attrib.) (x) EV/EBITDA (x) P/BV (x) P/CF (x) Div. Yield 9.5% 2.6% 2.1% 2.3% RoAE 18.0% 12.5% 9.1% 9.6% Figures in AED million, unless otherwise stated Estimates Changes (AED mn) 2008a 2009e 2010e Old New Old New Revenue 2,066 1,916 1,984 2,271 2,307 EBITDA EBITDA Margin 15.8% 21.8% 20.4% 16.1% 15.0% Net Attrib. Income *Prices as at 03 September Price(AED) DFMGI Rebased 03-Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep-09 Stock Data Last Dividend Ex-Date AED0.1 on1 April 09 Mkt. Cap. / Shares (mn) AED4,900 / 4,667 Av. Monthly Liqd. (mn) AED Week High / Low AED1.57 / 0.79 Bloomberg / Reuters AIRARABI UH / AIRA.DU Est. Free Float 63% 1

2 I. AVIATION INDUSTRY HIGHLIGHTS A. MIDDLE EAST OUTPERFORMS AVIATION INDUSTRY Given the current global economic climate, the global aviation industry continues to be hit by a sharp decline in passenger demand. An analysis of international aviation performance indicators during the first half of 2009 reveals that the Middle East has performed better than other emerging markets such as Latin America and Asia Pacific, and also compares favourably to the global aviation industry. The Middle East maintained positive growth in passenger traffic in 1H2009 Indeed, a look at Revenue Passenger Kilometer (RPK), a measure of passenger traffic, demonstrates that the Middle East is the only region to achieve positive growth rates during this period compared to other emerging markets and to the global industry as a whole, as shown in figure 1. We believe the region maintained this positive growth in passenger traffic during the first half of the year because it was less affected by both the global economic slowdown (our Economics team forecast a combined positive real non-oil GDP growth rate of 2% in 2009e for the GCC countries), and the outbreak of Influenza A (H1N1) relative to its emerging peers (Asia Pacific and Latin America) and to the overall industry. Middle East Passenger Traffic remained robust in July, growing 13.2% Y-o-Y, compared to a decline of 2.9% for the industry as a whole. Figure 1: Revenue Passenger Kilometer In %, unless otherwise stated Middle East Asia Pacific Latin America Industry 15% 10% 5% 0% -5% -10% -15% -20% January February March April May June Source: International Air Transport Association (IATA) A further indicator, Available Seat Kilometer (ASK), which is a measure of passenger capacity, shows that the Middle East outperforms its emerging market peers and the overall industry with positive capacity additions during the first six months of the year. Although Latin America saw some capacity growth in March and April, this was at a modest rate compared to the Middle East. This growth is reflected in the significant capacity expansions currently being undertaken in the region, with new carriers entering the market and existing carriers expanding their fleets considerably to meet the region s growing demand. This trend has continued into July, with the Middle East seeing a significant passenger capacity growth of 15.3% Y-o-Y, compared to a 2.8% decline in the overall industry. 2 KINDLY REFER TO THE IMPORTANT DISCLOSURES AND DISCLAIMERS ON BACK PAGE

3 Figure 2: Available Seat Kilometer In %, unless otherwise stated Middle East Asia Pacific Latin America Industry 20% 15% 10% 5% 0% -5% -10% -15% January February March April May June Source: International Air Transport Association (IATA) Meanwhile load factors for the various regions followed a similar trend to each other in 1H2009, largely owing to the impact of seasonality. That being said, the Middle East, which had the lowest load factors compared to Asia Pacific and Latin America at the beginning of the year, managed to achieve the highest load factors of the group by the end of June. Load factors for Latin America came under pressure in May and June as a result of the sharp decline in traffic volumes caused by the outbreak of the Influenza (H1N1) pandemic. Although Asia Pacific had relatively less exposure to the flu compared to Latin America, traffic volumes were nevertheless hit severely by the global pandemic as passengers in Asia are, according to IATA, "more sensitised to the potential risks of the flu following their experience of SARS in 2003". Significant capacity additions are contributing to pressure on load factors in the Middle East It is worth noting that load factors in Europe and North America remained robust in 1H2009 (averaging 73.4% and 76.4% respectively), and were still ahead of the 71.1% average achieved in the Middle East. We believe the dramatic discounting in average fares seen in Europe and North America was the main reason for load factors remaining relatively high in these regions. This compares to the Middle East, where significant capacity additions have contributed to pressure on load factors. The overall aviation industry exhibited strong load factors of 80.3% in July compared to load factors of 75.3% in June mainly as a result strengthening traffic volumes. 3

4 Figure 3: Load Factors In %, unless otherwise stated Middle East Asia Pacific Latin America January February March April May June Source: International Air Transport Association (IATA) B. PRICE COMPARISON BETWEEN UAE AIRLINE CARRIERS In a previous note (Time for Take-Off, 17 March 2009), we considered that competition from FlyDubai did not represent a major threat to Air Arabia, in at least the short-term (i.e 2009). Meanwhile, we suspected that Emirates Airlines was more likely to suffer from the new entrant to the market given that they both hub out of Dubai. Since our note in 1Q2009, FlyDubai launched its operations in June 2009, serving five active destinations and plans to expand its routes aggressively by the end of the year. In order to assess the competitive landscape facing Air Arabia at this point (mid third quarter), we have compared the fares offered by Air Arabia and FlyDubai to determine the level of competition between the two UAE-based LCCs. We have assumed departure on 30 September and return on 7 October to standardize the impact of seasonality on ticket prices. Our analysis reveals that FlyDubai prices are, on average, 18% lower than the prices offered by Air Arabia for the same routes. This is not a total surprise, given FlyDubai s recent entry into the market. As a new entrant, its key point of differentiation is price and, as such, it is used as a marketing tool to grab some traction and build both market share and load factors. While this may have a short-term adverse impact on Air Arabia, it is worth noting that i) FlyDubai only competes with Air Arabia on 5 of its 58 routes, and ii) the price differential is unsustainable in our opinion and we think it will narrow and disappear over the medium-term. FlyDubai a more serious threat to Emirates Airlines than Air Arabia Meanwhile, we still believe that FlyDubai represents a more serious threat to Emirates Airline. Our fare comparison exercise has shown that FlyDubai s fares are on average 18% cheaper compared to Air Arabia, but 43% cheaper than Emirates Airline. With both FlyDubai and Emirates Airline using Dubai as their main hub (compared to Air Arabia which is based in Sharjah) and with both companies having the same management (Emirates Group), we believe most of FlyDubai s market share will be captured at the expense of Emirates Airline. Indeed, the LCC market remains under-exploited in the UAE, with LCCs controlling 5% of traffic compared to a 25-30% market share in Europe and America. This suggests that there is significant room for organic growth in the LCC sector. 4 KINDLY REFER TO THE IMPORTANT DISCLOSURES AND DISCLAIMERS ON BACK PAGE

5 Figure 4: Price Comparison between Air Arabia and FlyDubai In AED, unless otherwise stated Air Arabia FlyDubai 1,500 1,300 1, Alexandria Aleppo Amman Beirut Damascus Source: Air Arabia, FlyDubai Air Arabia remains less expensive compared to conventional carriers Air Arabia maintained its price differential compared to conventional carriers, such as Emirates Airlines and Etihad Airways, remaining an average of 40% cheaper despite more aggressive discounting by these national carriers during the first six months of the year. We believe discounting offered by conventional carriers is short-lived, as these carriers are more operationally leveraged compared to LCCs and can t afford to continue competing on prices. Figure 5: Price Comparison between Air Arabia and Conventional Carriers In AED, unless otherwise stated Air Arabia Etihad Airways Emirates 2,500 2,000 1,500 1, Beirut Amman Kochi (India) Mumbai Tehran Riyadh Bahrain Doha Source: Air Arabia, Etihad Airways, and Emirates Airlines C. UAE AVIATION MARKET UPDATE We have recently seen competition becoming more aggressive between LCCs in the UAE aviation sector, with both FlyDubai and Air Asia launching their operations. FlyDubai launched operations with an aggressively expansionist fleet and route strategy FlyDubai, which launched its operations last June, announced that it plans to double the number of cities it serves by the end of 2009, and triple its fleet size by the end of It currently serves five destinations and added Djibouti as a sixth destination in September. Djibouti will be the first of FlyDubai's destinations that Air Arabia does not serve. FlyDubai's management has pointed out that it plans to focus in the immediate future on launching flights to cities that are under-served. FlyDubai s current fleet stands at four planes, with delivery of two more expected by the end of the year and six more scheduled for delivery by the end of 2010, according to the company s management. This will take its total fleet size to twelve aircraft, compared to Air Arabia whose fleet is expected to reach 21 planes by the end of 2010e. 5

6 Although we believe FlyDubai s competitive impact on Air Arabia is limited in the short-term, we view FlyDubai as a serious competitor to Air Arabia in the longer-term, particularly with its aggressive fleet and route expansion strategy. That being said, it is interesting to note that FlyDubai is looking to focus on under-served destinations rather than trying to compete head-on with established carriers such as Air Arabia, who are operationally second-to-none and who already have an established customer base and thus significant market share. Air Asia seeks to establish de facto feeder relationships with local LCCs Meanwhile Air Asia, Malaysia's low cost carrier, announced a few weeks ago that it has selected Abu Dhabi to become its regional hub in the Middle East, to connect flights to potential destinations in Europe, Asia and Central Asia. It is worth noting that Air Asia was the first LCC to apply the no-frills business model, typically applied to flights of a maximum duration of four hours, to long-haul routes of more than eight hours. Air Asia has announced that it will begin services between Abu Dhabi and Kuala Lumpur next October at significantly reduced fares. We don't see the launch of Air Asia as a threat to Air Arabia, particularly given that the Asian LCC has announced that it wants to establish de facto feeder" relationships with Air Arabia and FlyDubai, where the UAE LCCs can feed Air Asia with traffic from the cities they serve in the region while Air Asia feeds them with traffic from its Asian destinations. 6 KINDLY REFER TO THE IMPORTANT DISCLOSURES AND DISCLAIMERS ON BACK PAGE

7 II. CHANGES TO ESTIMATES We have changed our estimates to reflect our new in-house oil price assumptions for 2009e and 2010e, as well as our new average fare forecasts. A. HIGHER FUEL COSTS We have increased our oil price assumption for 2009e and 2010e to match our Economics team s new forecasts. Our in-house oil price estimates were revised upwards to USD60 p/b from USD50 p/b in 2009e and to USD70 p/b from USD65 p/b in 2010e. It is important to highlight that our new oil price forecasts are driven by an improved market perception regarding the global economy, rather than a material change in the fundamentals of the global economy or the oil market. We have increased our fuel cost assumptions for Air Arabia to reflect our new in-house oil price forecasts Accordingly, we have increased our fuel cost assumptions for Air Arabia to reflect oil prices at USD57.5 p/b from our previous assumption of USD50 p/b in 2009e. Our new assumption takes into consideration the fact that Air Arabia has hedged 55% of its fuel requirements for 2009e at around USD50 p/b (with a ceiling of USD60 p/b)..our new forecast of USD57.5 p/b is therefore a blend of this hedging and the new USD60 p/b oil price forecast for 2009e, and is more heavily weighted towards the second half of the year where the company generally uses more fuel to meet the increasing seasonal demand in the third and the fourth quarters. To give an indication of the impact that this small change has to our fuel costs for Air Arabia, we note that a 15% increase in our fuel cost assumptions has led to a 10% increase in our fuel cost estimates for the year, which results in a 2% decline in net income in 2009e We have increased our oil price assumption to USD70 p/b in 2010e, up from our previous forecast of USD65 p/b as we still have no visibility regarding the company's hedging strategy in 2010e. Beyond2010e, we have kept our oil price assumptions unchanged at USD70 p/b. Figure 6: Estimates of Average Price of Crude Oil USD per barrel, unless otherwise stated Figure 7: Cost of Sales Breakdown Percentage of total COGS, unless otherwise stated 120 Fuel Costs Others Lease Rentals % 80% 60% 40% 20% 0% e 2010e 2011e 2012e 2013e 2014e 2015e 2008a 2009e 2010e 2011e 2012e 2013e 2014e 2015e Source: Bloomberg, EFG-Hermes estimates Source: EFG-Hermes estimates 7

8 B. HIGHER AVERAGE FARE We have also revisited our average fare forecasts to reflect: i) the company s ability to pass a small portion of the increase in fuel costs to its customers in the form of fuel surcharges, and ii) our view that the company will be able to achieve a higher average fare compared to our previous FY2009e estimate, given the higher than expected average fare achieved so far in 1H2009. We have also increased our average fare assumptions to reflect higher fuel surcharges We have increased our average fare assumption to AED435 in 2009e, up from our previous conservative assumption of AED420. Our new estimate also reflects management s guidance for 2009e yields (revenue per passenger). Indeed, during the conference call held after the company s second quarter results, management pointed out that Air Arabia will continue to see yield dilution in the range of 13% to 15% until the end of the year. Our new average fare assumption implies a revenue per passenger figure of AED457 (higher than the average fare as it also includes auxiliary revenues), implying a decline of 13%Yo-Y in line with management s projections We have also raised our average fare in 2010e to AED445, up from our previous assumption of AED438, reflecting the increase in the company's fuel costs for the year. C. UNCHANGED LOAD FACTOR ASSUMPTIONS We have maintained our load factor assumption at 80% for FY2009e. With Air Arabia achieving a load factor of 80% in the first half of 2009, we believe our FY2009e estimate remains sound, particularly given that the second half of the year has traditionally been stronger in terms of both load factors and revenue generation (as summer holidays coincide with 3Q and religious/national holidays have tended to coincide with 4Q). We estimate a load factor of 79.5% in 2010e, and we expect load factors to decline slightly beyond 2010e as the company adds new routes. 8 KINDLY REFER TO THE IMPORTANT DISCLOSURES AND DISCLAIMERS ON BACK PAGE

9 IMPACT OF ESTIMATES CHANGE ON FY2009E NUMBERS As a result of our revised average fares, our revenue estimates have increased by 3.6% to AED1,984 million in 2009e, up from our previous forecast of AED1,916 million. Revenues in 2010e have also increased marginally by 1.6% to AED2,306 million from AED2,271million. Given that fuel costs represent more than 40% of Air Arabia's total costs in 2009e and 2010e, the upward revision in our fuel cost assumptions has put pressure on gross margins despite the increase in top-line numbers. Hence, gross margins have decreased 140 basis points and 110 basis points in 2009e and 2010e, to 26% and 20.4% respectively. Net income forecasts consequently fall by 2% to AED502.5 million in 2009e (vs. our previous estimate of AED512.9 million) and by 4% to AED416.6million in 2010e (vs. our previous estimate of AED435.9 million). Figure 8: New versus Old Forecasts In AED million, unless otherwise stated 2009e 2010e New Old Variance New Old Variance Load Factors 80.0% 80.0% 79.5% 79.5% Average Fare (AED) Passenger Numbers 4,519,943 4,519,943 5,133,364 5,133,364 Passenger Revenue 1, , , ,248.4 Baggage Revenue Cargo Revenue Service Income Sales Commission & Expenses (45.7) (44.1) (53.1) (52.2) Total Revenues 1,984 1, % 2,307 2, % Fuel Costs (617.5) (561.6) 10.0% (823.0) (780.4) 5.5% Lease Rentals (260.5) (260.5) 0.0% (294.2) (294.2) 0.0% Others - Staff / Handling / Ins etc (589.9) (569.5) 3.6% (719.6) (708.3) 1.6% Cost of Sales (1,468) (1,392) 5.5% (1,837) (1,783) 3.0% Gross Profit % % Gross Profit Margin 26.0% 27.4% 20.4% 21.5% SG&A (111.1) (107.3) 3.6% (124.6) (122.6) 1.6% EBITDA % % EBITDA Margin 20.4% 21.8% 15.0% 16.1% Depreciation and Amortization (73.2) (73.2) 0.0% (92.6) (92.6) 0.0% Net Operating Profit % % Net Operating Margin 16.7% 18.0% 11.0% 12.0% Investment Income % % Net Interest Income (Expense) % % Sundry Income % % Other Income % Net Attributable Income % % Source: EFG-Hermes estimates 9

10 III. VALUATION Our new DCF now suggests a LTFV of 1.52 per share Our DCF valuation has only been slightly affected by the changes to our fuel costs and average fare assumptions. Our new DCF suggests a Fair Value of AED1.52 per share, as opposed to our previous fair value of AED1.53. It is important to note that our valuation only takes into consideration the company's capacity at its existing hub in Sharjah, and excludes the potential value of Air Arabia's new Moroccan hub which is expected to break-even in its first year of operations (and could potentially add a further estimated AED0.15 to our LTFV, based on Air Arabia s 29% stake) Given that Air Arabia has a net cash position, our WACC is equal to the company's cost of equity, which we derive from an estimated risk-free rate of 5.15% (equal to the 10 year US Treasury bond rate plus a country risk premium) and an equity risk premium of 6.25% (in line with the range used for European low cost carriers). Meanwhile, we continue to assume a perpetual growth rate of 3.5% driven by our view that Air Arabia is well positioned to achieve above average growth rates in the long-term given the prospects for the regional economy and the under-penetration of the LCC market given its relative immaturity. It is worth noting that due to the relative immaturity of the company and its high capex requirements in the short to medium term as it builds out its fleet (with delivery of ten purchased planes in each year from 2013e through to 2015e), our DCF analysis results in a negative firm value through the forecast period. The terminal value provides more than 100% of the end firm value and around 50% of the end equity value comes from the cash and available for sale investments on the balance sheet (as shown in figure 9). We believe this is the major downside risk to our valuation, as the longer-term cash flows are inherently more risky and may be subject to stronger competition in the LCC space than we are currently assuming. However, we are mindful of the fact that the LCC market remains under-penetrated in the region and therefore, we feel this level of anticipated growth is sustainable, even accounting for the impact of competition in the medium-term to longer-term. Figure 9: DCF Valuation AED million, unless otherwise stated ` 2009e 2010e 2011e 2012e 2013e 2014e 2015e 2016e 2017e 2018e EBITDA ,017 1,279 1,374 1,397 1,411 Change in Working Cap Capex (593) (663) (721) (585) (1,335) (1,307) (1,307) (525) (523) (523) Adj. for Depn. of Op. Leases (39) (42) (70) (136) (169) (170) (166) (99) - - FCF (201) (280) (332) (96) (675) (415) (163) Discount Factor Discounted FCF (191) (239) (254) (66) (415) (229) (81) Terminal value 12,111 Perpetual Growth Rate 3.5% WACC 11.4% PV of Cash Flows (437) PV of Perpetuity 4,227 Total Firm Value 3,790 Net (Debt) / Cash 3,290 Equity Value 7,080 No. Shares 4,667 Price (AED) 1.52 Source: EFG-Hermes estimates 10 KINDLY REFER TO THE IMPORTANT DISCLOSURES AND DISCLAIMERS ON BACK PAGE

11 Our DCF remains only modestly sensitive to both our WACC and perpetuity growth rate assumptions, as almost 50% of the company s equity value is derived from its net cash balance, as illustrated in Figure 10. Figure 10: Sensitivity Analysis AED per share, unless otherwise stated Perpetual Growth rate WACC 10.4% 10.9% 11.4% 11.9% 12.4% 2.5% % % % % Source: EFG-Hermes estimates We believe Air Arabia will be able to protect its market share RECOMMENDATION Although competition is intensifying in the UAE aviation sector, we believe Air Arabia's best-in-class operational efficiencies should mean that it will continue to trade robustly going forward. In our opinion, the company s first mover advantage will enable the carrier to compete effectively against new entrants and thus protect its market share. And crucially, its price differential (lower prices) compared to the conventional carriers still remains wide. Given the under-penetrated nature of the LCC market in the region, the company s operational strengths and further potential upside from additional hubs/acquisitions (something that is not reflected in our existing forecasts), we believe Air Arabia is well positioned to become a leading carrier in the region. Our DCF valuation gives us a fair value which is currently 45% above the existing share price, and we therefore reiterate our ST Accumulate/ LT Buy recommendation on the stock. 11

12 IV. FINANCIAL STATEMENTS Income Statement (December Year End) In AED million, unless otherwise stated 2008a 2009e 2010e 2011e 2012e Revenues 2,066 1,984 2,307 2,598 3,141 Cost of Sales (1,636) (1,468) (1,837) (2,038) (2,422) Gross Profit Gross Profit Margin 20.8% 26.0% 20.4% 21.6% 22.9% SG&A (104.0) (111.1) (124.6) (135.1) (157.1) EBITDA EBITDA Margin 15.8% 20.4% 15.0% 16.4% 17.9% Depreciation and Amortization (35.7) (73.2) (92.6) (128.1) (177.9) Net Operating Profit Net Operating Margin 14.0% 16.7% 11.0% 11.4% 12.2% Investment Income Net Interest Income (Expense) Sundry Income (parking charges waiver) Other Income Earnings before Taxes Taxes Earnings before Minority Interest Minority Interest Net Income Source: Air Arabia, EFG-Hermes estimates Balance Sheet (December Year End) In AED million, unless otherwise stated 2008a 2009e 2010e 2011e 2012e Cash and Time Deposits 1,767 1,321 1,362 1,642 2,208 Accounts Receivables Inventory Total Current Assets 2,010 1,518 1,591 1,900 2,520 Net Plant 921 1,448 2,027 2,628 3,043 Net Investments 1,574 1,573 1,572 1,571 1,571 Aircraft Lease Deposits Total Intangibles 1,314 1,751 1,753 1,759 1,761 Other Assets Total Assets 5,862 6,343 6,995 7,908 8,950 ST Debt Due to Related Parties Total Payables Dividends Payable Other Current Liabilities Total Current Liabilities Provisions LT Debt ,251 Minority Interest Total Liabilities & Provisions ,495 2,133 Shareholders Equity 5,384 5,760 6,073 6,413 6,817 Source: Air Arabia, EFG-Hermes estimates 12 KINDLY REFER TO THE IMPORTANT DISCLOSURES AND DISCLAIMERS ON BACK PAGE

13 Cash Flow Statement (December Year End) In AED million, unless otherwise stated 2008a 2009e 2010e 2011e 2012e Cash Operating Profit after Tax Change in Working Capital Cash Flow after Change in WC Capital Expenditure (678) (593) (663) (721) (585) Free Cash Flow (296) (162) (239) (262) 40 Non-operating Cash Flow (917) (351) Cash Flow Before Financing (1,213) (513) (142) (159) 159 Net Financing Change in Cash (1,203) (445) Source: Air Arabia,EFG-Hermes estimates 13

14 EGYPT SALES TEAM Local call center Int l call center cc-hsb@efg-hermes.com UAE SALES TEAM call center uaerequests@efg-hermes.com KSA SALES TEAM call center ksa-callcenter@efg-hermes.com RESEARCH MANAGEMENT Cairo General UAE General efgresearch@efg-hermes.com Head of Western Institutional Sales Mohamed Ebeid mebeid@efg-hermes.com Western Institutional Sales Julian Bruce jbruce@efg-hermes.com Deputy Head of Gulf Sales Ahmed Sharawy asharawy@efg-hermes.com Head of Research Wael Ziada wziada@efg-hermes.com Local Institutional Sales Amr El Khamissy amrk@efg-hermes.com Head of GCC Institutional Sales Amro Diab adiab@efg-hermes.com Head of Publ. and Distribution Rasha Samir rsamir@efg-hermes.com GCC Business Development Ahmed Salem asalem@efg-hermes.com Gulf HNW Sales Chahir Hosni chosni@efg-hermes.com UAE Retail Sales Reham Tawfik rtawfik@efg-hermes.com DISCLOSURES We, Abid Riaz and Nadine Hassouna, hereby certify that the views expressed in this document accurately reflect our personal views about the securities and companies that are the subject of this report. We also certify that neither we nor our spouses or dependants (if relevant) hold a beneficial interest in the securities that are traded in the UAE stock exchanges. EFG-Hermes Holding SAE hereby certifies that neither it nor any of its subsidiaries owns any of the securities that are the subject of this report. Funds managed by EFG-Hermes Holding SAE and its subsidiaries (together and separately, "EFG-Hermes") for third parties may own the securities that are the subject of this report. EFG-Hermes may own shares in one or more of the aforementioned funds or in funds managed by third parties. The authors of this report may own shares in funds open to the public that invest in the securities mentioned in this report as part of a diversified portfolio over which they have no discretion. The Investment Banking division of EFG-Hermes may be in the process of soliciting or executing fee earning mandates for companies that are either the subject of this report or are mentioned in this report. DISCLAIMER This Research has been sent to you as a client of one of the entities in the EFG-Hermes group. This Research must not be considered as advice nor be acted upon by you unless you have considered it in conjunction with additional advice from an EFG-Hermes entity with which you have a client agreement. Our investment recommendations take into account both risk and expected return. We base our long-term fair value estimate on a fundamental analysis of the company's future prospects, after having taken perceived risk into consideration. We have conducted extensive research to arrive at our investment recommendations and fair value estimates for the company or companies mentioned in this report. Although the information in this report has been obtained from sources that EFG-Hermes believes to be reliable, we have not independently verified such information and it may not be accurate or complete. EFG-Hermes does not represent or warrant, either expressly or implied, the accuracy or completeness of the information or opinions contained within this report and no liability whatsoever is accepted by EFG-Hermes or any other person for any loss howsoever arising, directly or indirectly, from any use of such information or opinions or otherwise arising in connection therewith. Readers should understand that financial projections, fair value estimates and statements regarding future prospects may not be realized. All opinions and estimates included in this report constitute our judgment as of this date and are subject to change without notice. This research report is prepared for general circulation to the clients of EFG-Hermes and is intended for general information purposes only. It is not intended as an offer or solicitation or advice with respect to the purchase or sale of any security. It is not tailored to the specific investment objectives, financial situation or needs of any specific person that may receive this report. We strongly advise potential investors to seek financial guidance when determining whether an investment is appropriate to their needs.

15 GUIDE TO ANALYSIS EFG-Hermes investment research is based on fundamental analysis of companies and stocks, the sectors that they are exposed to, as well as the country and regional economic environment. Two investment ratings are offered for each stock, a Short-Term rating and a Long-term rating. The Short-Term (ST) rating is based on the analyst s best expectations on the shorter-term price movements of the stock. Short-Term is defined as any time up to six months of the rating being applied to the stock. While shorter-term drivers could include quantifiable facts and figures, the analyst may also consider nonquantifiable issues such as the analyst s view on investor sentiment, potential news flow on the stock or the sector, or other issues which could impact share price movements. The Long-Term (LT) rating is based on the percentage upside or percentage downside of the stock price to the analyst s Long Term Fair Value (LTFV). Long Term is defined as any time period beyond 1 year. The LTFV is based on the analyst s current expectations of the equity fair value of the company on a per share basis which is normally based on rigorous and fundamental long-term analysis of the company s financial potential. Of course, any such analysis is based on the analyst s expectations for the future and are always considered estimates. For both the Short-Term and Long-Term ratings for any investment covered in our research, the ratings are defined by the following ranges in percentage terms: Rating Buy Accumulate 10 to 25% Neutral (10%) to 10% % upside (downside) 25% and above Reduce (10%) to (25%) Sell (25%) or more downside EFG-Hermes policy is to update research reports when appropriate based on material changes in a company s financial performance, the sector outlook, the general economic outlook, or any other changes which could impact the analyst s outlook or rating for the company. Share price volatility may cause a stock to move outside of the longer-term rating range to which the original rating was applied. In such cases, the analyst will not necessarily need to adjust the rating for the stock immediately. However, if a stock has been outside of its longer-term investment rating range consistently for 30 days or more, the analyst will be encouraged to review the rating. COPYRIGHT AND CONFIDENTIALITY No part of this document may be reproduced without the written permission of EFG-Hermes. The information within this research report must not be disclosed to any other person if and until EFG-Hermes has made the information publicly available. CONTACTS AND STATEMENTS Background research prepared by EFG-Hermes UAE Limited. Report prepared by EFG-Hermes Holding SAE (main office), 58 Tahrir Street, Dokki, Egypt 12311, Tel Fax which has an issued capital of EGP 1,939,320,000. Reviewed and approved by EFG-Hermes KSA (closed Joint Stock Company) which is commercially registered in Riyadh with Commercial Registration number , and EFG-Hermes UAE Limited, which is regulated by the DFSA and has its address at Level 6, The Gate, DIFC, Dubai, UAE. The information in this document is directed only at institutional investors. If you are not an institutional investor you must not act on it. bloomberg efgh reuters pages.efgs.hrms.efgi.hfismcap.hfidom EFG-HERMES.COM