Goldman raises Air Arabia’s 2013-14 net profit estimates

DUBAI — Goldman Sachs, an investment banking firm, on Tuesday raised net profit estimates for Air Arabia, the region’s fast growing low cost carrier, in fiscal 2013-14 on improving earning margins driven by lower costs and increase capacity.

“We increase our financial year 2013/14 net profit estimates by five to six per cent on improved Earnings Before Interest, Taxes, Depreciation and Amortization, or EBITDA, margins led by lower costs and increased capacity,” the investment bank said “Air Arabia reported clean net profit of Dh405 million, up 57 per cent year on year, and 12 per cent higher than our estimate of Dh362 million and five per cent above Reuters consensus of Dh386 million,” the bank said in its Equity Research.

It noted that Air Arabia’s fourth quarter 2012 numbers reflected strong revenue growth of 18 per cent and EBITDA margin expansion, continuing the first nine months trend.

“The key driver of growth in 2012 was growing passenger numbers to 5.3 million, up 13 per cent year on year, helping maintain the seat load factor at 82 per cent in line with 2011 of 82 per cent despite an 11 per cent increase in available seat kilometer,” the investment bank said.

Goldman Sachs forecast a marginal increase in ticket prices, by five per cent in 2013-14 (for the low-cost carrier, along with a 10 per cent growth in passengers, slightly higher than the nine per cent capacity addition (seven new airplanes) for the period. “As a result, we now expect a seat load factor of 84 per cent, the highest since 2008. With capacity additions and lower fuel costs, we forecast an EBITDA margin improvement of 340 basis points to 21 per cent in 2014. We also cut our assumption of interest rates on leases to three per cent from six per cent given favourable terms of funding available and reduced losses from associates, as the company expects the Morocco hub to achieve break-even in 2013.”

The bank said in line with its increased forecasts, it was raising the 12-month Enterprise value/ Earnings Before Interest, Taxes, Depreciation and Amortization, and Restructuring or Rent Costs, or EV/EBITDAR, based price target from Dh1.04 to Dh1.14.

Air Arabia’s stock currently trades on Price to Earnings Ratio of 8.6: 6.7 against its five-year historical median of 14.5. “Our new 12-month price target implies a 27 per cent potential upside.”

It noted that the main risk to its price target is higher/lower-than-expected passenger load factor and fuel cost inflation. “Delay in new fleet addition is also a risk.”

In January, Air Arabia flew a record number of passengers as the airline carried almost half a million passengers.

Latest statistics released by the airline show that it carried a total of 492,847 passengers in the month, an increase of nearly 15 per cent as compared to a year earlier.

This represents the highest number of passengers that the airline handled in a month since inception.

The airline’s seat load factor – passengers as a percentage of total seats available – stood at an impressive 82.5 per cent, further demonstrating the growing popularity of the Air Arabia’s value for money services.

The airline has witnessed a steady increase in passenger numbers in 2012. Last year, the low-cost pioneer carried has 5.3 million passengers, an increase of over 13 per cent compared to 2011.

Adel Ali, Group Chief Executive Officer, Air Arabia, said: “The record number demonstrates the strength of Air Arabia offering affordable fares to an ever growing range of destinations.”

— issacjohn@khaleejtimes.com