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Air Arabia

Source: Naeem Investment

Don’t dwell on the past

Air Arabia suffered in 2009, but fared better than most other airlines. While 4Q09 earnings were weaker than forecast, we look ahead to 2010 when a recovery in traffic, capacity adds and firmer pricing, should revive earnings. We remain excited over prospects for the Morocco and Egypt hubs. 4Q09 net earnings fell 14.6% YoY to 116m, (-13% vs. estimate). 4Q09 revenue fell 12% YoY (-6% vs. estimate). 2009 revenue was down 4.5% to AED1.97bn while net profit slipped 11.3% to AED452m. Passenger traffic grew 14% in 2009, and was up 4.8% QoQ in 4Q09, in line with estimate. 2009 load factor was 80%, 2pps above expectation. 2009 Rev/pax fell 16.7% YoY to AED462 (1.5% below forecast) and cost/pax fell 15.4% YoY. 2009 EBITDAR margin increased 2pps YOY to 38%. We downgrade our TP to AED1.2/share, but maintain our BUY call.

4Q09 net earnings weaker than expected. Air Arabia passenger traffic was up 10% YoY (4.8% QoQ) in 4Q09, and up 14% for the full year, exactly in line with forecast. Total fleet remained at 21 in 4Q (18 based in Sharjah, 3 in Casabalanca). Revenue for 4Q09, however, came in 6% below our estimate on weaker yields, and this flowed through to the bottom line. 4Q09 net earnings fell 14.6% YoY, coming in 13% below estimate. We forecast passenger traffic to rise 17% in 2010 as an economic recovery sets in and as new capacity comes on stream. This is more optimistic than management’s guidance of 12-13%. We expect revenue to grow 10% and net earnings to return to growth of 4.7%.

Fair value estimate revised to AED1.2/share. Although we have reduced our fair value to AED1.2/share from AED1.5/share, we maintain our Buy recommendation as Air Arabia’s prospects remain bright in our view.

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