Operating Profitability Weakens

Transcription

1 Air arabia Operating Profitability Weakens May 16, 2011 Key data Fair Value per share (AED) 0.75 Closing Price (AED) * week High / Low (AED) 0.90/0.72 YTD / 12-month return -11%/-19% P/E (TTM) 11.4 Shares Outstanding (Millions) 4,667 Market Cap (AED Millions) 3,407 Free Float 55.0% Reuters / Bloomberg Code AIRA.DU/AIRARABI UH *Price as of close on May 15, 2011 Sources: Bloomberg and NBK Capital Key METRICS 2010A 2011F 2012F 2013F EPS EPS Growth -32.4% -51.9% 24.1% 6.0% P/E Dividend Yield 11.0% 3.5% 3.2% 3.4% EV/EBITDA Revenue (Millions) 2,080 2,291 2,535 2,755 Revenue Growth 5.5% 10.1% 10.7% 8.7% EBITDAR (Millions) EBITDAR Growth -6.1% -22.1% 29.3% 12.2% EBITDAR Margin 23.3% 16.3% 19.1% 19.7% Sources: Company financials and NBK Capital Quarterly FORECASTS AED M illions 2Q2010A 1Q2011A 2Q2011F 3Q2011F Revenue EBITDAR a = actual, f = forecast. Sources: Company financials and NBK Capital Rebased Performance May-10 Jul-10 Sep-10 Nov-10 Jan-11 Mar-11 May-11 Air Arabia Sources: MSCI, Bloomberg, and NBK Capital MSCI UAE Highlights 12-Month Fair Value: AED 0.75 Recommendation: Hold-Risk Level: 4** Reason for Report: 1Q2011 Update Despite having achieved some strong operating statistics, Air Arabia posted a disappointing financial performance in 1Q2011. Air Arabia registered an 11% increase in traffic in 1Q2011 to 1.2 million passengers and a high load factor of 86% (compared to 80% in 1Q2010). However, growth in revenue was lower than that achieved for the number of passengers, which highlights the continued pressure on yields. Air Arabia s revenue increased by 6% to AED 513 million, 8.7% lower than our forecast. On the other hand, yield (revenue per passenger) fell by 5% to AED 446, a surprising outcome given the cost pressure the company is facing from rising fuel costs. Air Arabia s yield stood at AED 469 in 4Q2010, and given that jet fuel prices have been on the rise since 4Q2010, we were anticipating yields to expand to compensate for the increase in this cost item. In our forecast, we assumed a 5% improvement in yields. The combination of rising fuel costs and the drop in revenue per passenger proved to be lethal. Air Arabia s operating profit came in at a meager AED 1 million, while EBITDAR saw a 33% decline to AED 58.2 million (36% lower than our forecast). This differential is largely due to a weakerthan-expected top-line performance, as the fuel expense was in line with our forecast. We believe that such a weak operating profit will roll over to 2Q2011, as we expect the fuel expense to increase by about 30%. We foresee that 2Q2011 will be one of the most challenging quarters in Air Arabia s history, but we anticipate an improvement in the company s fortunes in 3Q2011. We lowered our 12-month fair value target for Air Arabia s stock price by 6%, from AED 0.80 per share to AED 0.75 per share. This drop is driven by a lower forecast for operating profit in 2011 and a lower assumption for yield expansion over the short-term. We feel that Air Arabia s stock price has some downward protection as cash and available-for-sale investments (after accounting for the dividend payment) account for AED 0.47 per share (65% of the current price). Based on yesterday s closing price, our recommendation for Air Arabia is Hold. Analyst Samir Murad, CFA T E. samir.murad@nbkcapital.com **Please refer to page 6 for recommendations and risk ratings. nbkcapital. com

2 Revenue misses our forecast due to a decline in yields Air Arabia registered an 11% increase in traffic in 1Q2011 to 1.2 million passengers and a high load factor of 86% (compared to 80% in 1Q2010). However, this improvement in passenger traffic numbers was offset by a 5% decline in yield (revenue per passenger), from AED 468 in 1Q2010 to AED 446 in 1Q2011. Accordingly, growth in revenue was lower than that for the number of passengers, with revenue increasing by just 6% to AED 513 million 8.7% lower than our forecast. The 5% drop in Air Arabia s yield in 1Q2011 came as a surprise, given that the airline s fuel expense was 28% higher in 1Q2011 than in 1Q2010. We were anticipating an improvement in the yield in 1Q2011 to offset some of the increase in fuel costs. According to management, the airline started to introduce fuel surcharges in late February, the impact of which started to be felt in March. We view this as an indication of better yields in 2Q2011 than in 1Q2011, as the average ticket price should increase due to the inclusion of fuel surcharges. Accordingly, we anticipate yields will improve by 10% in 2Q2011 and by an additional 10% in 3Q2011. Overall, our revenue forecast for 2011 shows a 9% increase over 2010 but represents a 7% reduction from our previous estimate. Figure 1 Revenue per Passenger Revenue per passenger was surprisingly weak in 1Q2011 AED Q2010 2Q2010 3Q2010 4Q2010 1Q2011 Revenue per Passenger Sources: Air Arabia and NBK Capital As expected, fuel costs rise sharply, and we anticipate an additional increase in 2Q2011 Jet fuel prices have soared in 2011, with the current price already 56% higher than the average in FY2010. Air Arabia, which has hedged for only 15% of the airline s fuel requirement for 2011, remains severely exposed to this cost item. Fuel costs accounted for 34% of Air Arabia s FY2010 revenue and 43.5% of 1Q2011 revenue. The company s defense against the increase in this cost rests on Air Arabia s ability to pass some of the cost increase to its customers, a strategy that did not bear fruit during 1Q2011. nbkcapital. com 2

3 Figure 2 Jet Fuel Prices (Kerosene Type) Fuel prices have been soaring Dollar per Gallon May-10 Jul-10 Sep-10 Nov-10 Jan-11 Mar-11 May-11 Source: US Energy Information Administration Air Arabia barely breaks even at the operating level in 1Q2011, and profitability for the rest of 2011 depends significantly on the airline s ability to increase yields Air Arabia saw a 33% decline in EBITDAR to AED 58.2 million, 36% lower than our forecast. This differential is largely due to a weaker-than-expected top-line performance, as the fuel expense was in line with our forecast. The airline barely broke even at the operating profit level, as the operating profit stood at a meager AED 1 million (a 94% decline from the level in 1Q2010). We expect that such a weak operating profit will roll over to 2Q2011, as we forecast that the fuel expense will increase by about 30%. We foresee 2Q2011 being one of the most challenging quarters in Air Arabia s history, but we anticipate an improvement in the company s fortunes in 3Q2011. Figure 3 Income Statement Summary Income Statement (AED Thousands) First-Quarter Results Common Size Change 1Q2010 1Q2011 Air Arabia barely broke even at the operating profit level Total Revenue 482, ,218 6% 100.0% 100.0% Cost of Revenue 432, ,026 11% 89.7% 93.1% Gross Profit 49,876 35,192-29% 10.3% 6.9% Selling and Marketing 10,135 7,774-23% 2.1% 1.5% General and Administrative 23,506 26,457 13% 4.9% 5.2% Operating Income 16, % 3.4% 0.2% Interest Income(Exp), Net Non-Operating 32,999 19,167-42% 6.8% 3.7% Other, Net , % 4.4% Net Income 49,607 42,704-14% 10.3% 8.3% EBITDA 28,583 22,475-21% 5.9% 4.4% Depreciation/Amortization 12,348 21,514 74% 2.6% 4.2% EBITDAR 86,446 58,175-33% 17.9% 11.3% Lease Rentals 57,863 35,700-38% 12.0% 7.0% Sources: Company financial statements and NBK Capital nbkcapital. com 3

4 We cut our fair value target by 6% to AED 0.75 per share to reflect a more challenging environment in the short-term than we had previously anticipated We revised our 2011 forecasts for Air Arabia to reflect a lower-than-previously-anticipated expansion in yields. In addition, we tweaked our fuel assumptions based on current market conditions. Overall, the changes we made resulted in a 14% decline in our EBITDAR forecast for 2011, from AED 435 million to AED 374 million. Due to Air Arabia s weaker-than-expected performance in 1Q2011, continued pressure on yields, and escalating jet fuel prices, we cut our fair value target for Air Arabia by 6% to AED 0.75 per share. Given that our new fair value is just 1% higher than Air Arabia s latest close, our recommendation for the stock is Hold. nbkcapital. com 4

5 Financial Statements Balance Sheet (A ED Tho usands ) Fiscal Year Ends December ASSETS Cash 1,996,251 1,844,563 1,000, , , ,517 79,280 Total Receivables, Net 292, , , , , , ,659 Total Inventory 5,051 6,437 7,403 8,513 9,364 10,301 11,331 Total Current Assets 2,293,513 2,426,065 1,320,415 1,138,213 1,183, , ,270 Property/Plant/Equipment, Total - Net 1,135,691 1,788,712 2,830,313 3,551,479 4,471,121 5,583,932 6,169,031 Goodwill and Intangibles 1,281,821 1,281,821 1,281,821 1,281,821 1,281,821 1,281,821 1,281,821 Long Term Investments 1,284, , , , , , ,594 Other Long-Term Assets, Total 76,243 67,653 85, , , , ,047 TOTAL ASSETS 6,071,497 6,369,998 6,305,234 6,842,913 7,818,296 8,277,152 8,898,762 LIABILITIES & EQUITY Historical Forecast Accounts Payable 427, , , , , , ,698 Other Current Liabilities, Total 129, , , , , , ,807 Total Current Liabilities 556, , , , , , ,505 Long-Term Debt - 214, , ,212 1,714,424 2,000,000 2,404,300 Other Liabilities, Total 46,235 59,377 62,346 65,463 68,736 72,173 75,782 Minority Interest 6,220 6,344 6,471 6,601 6,733 6,867 Total Liabilities 603, ,289 1,160,916 1,625,678 2,523,738 2,840,472 3,257,454 Total Equity 5,468,309 5,370,709 5,144,318 5,217,235 5,294,557 5,436,680 5,641,308 TOTAL LIABILITIES AND EQUITY 6,071,497 6,369,998 6,305,234 6,842,913 7,818,296 8,277,152 8,898,762 Income Statement (A ED Tho usands ) Historical Forecast Fiscal Year Ends December Total Revenue 1,971,965 2,080,313 2,290,550 2,534,777 2,755,095 2,970,136 3,171,193 Operating Expenses (1,642,609) (1,825,183) (2,071,896) (2,144,391) (2,233,383) (2,282,166) (2,246,687) Depreciation/Amortization (50,214) (55,448) (137,731) (204,102) (277,719) (375,496) (497,425) Operating Income 279, ,682 80, , , , ,081 Interest Income (Expense), Net 156, ,569 82,888 11,450 (45,789) (78,902) (116,931) Other, Net 16,823 (5,692) (13,021) (11,520) (897) 7,380 35,058 Minority Interest - (3,770) (3,845) (3,922) (4,001) (4,081) (4,162) Net Income 452, , , , , , ,046 Cash Flow Statement (A ED Tho usands ) Historical Forecast Fiscal Year Ends December Cash from Operating Activities 410, , , , , , ,974 Cash from Investing Activities 233,919 (135,347) (1,092,923) (886,646) (1,165,152) (1,473,256) (1,089,165) Cash from Financing Activities (415,460) (463,192) (191,697) 281, ,635 86, ,954 Net Change in Cash 229,126 (151,688) (844,251) (216,779) 17,273 (691,289) (30,237) Sources: Air Arabia and NBK Capital nbkcapital. com 5

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