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Air Arabia

Source: Taib Bank

Quarterly Update

Air Arabia’s revenues increased 4.1% YoY to AED 482.05 million during 1Q10 from AED 463.23 million during 1Q09.

Net profit was down to AED 49.61 million during the quarter from AED 103.37 million in 1Q09.

We have maintained our 2010E sales, while revised our net profit estimate downward by 9.5% on anticipation of higher operating costs.

We are reiterating our OVERWEIGHT recommendation on Air Arabia with a revised DCF target price of AED 1.08, implying an upside of 20.3%.

Profitability
Higher cost of sales vis-à-vis revenues resulted in a 40.7% decline in gross profit to AED 49.88 million from AED 84.15 million during 1Q09. As a percentage of revenues, gross margin was down 782 bps to 10.3% from 18.2%. Similarly, EBITDA declined 60.8% to AED 25.42 million from AED 64.79 million, while EBITDA margin plunged 871 bps YoY to 5.3% from 14.0% during 1Q09. Further, higher fuel prices and the negative impact of the financial downturn on the global aviation industry led to a decline in net margins to 10.3% from 22.3% in the year-ago period. Net profit declined 52.0% to AED 49.61 million from AED 103.37 million in 1Q09. As a result, adjusted annualised EPS decreased to AED 0.04 from AED 0.09 in the comparable period last year.

We had updated Air Arabia on April 18, 2009 with an OVERWEIGHT recommendation (target price of AED 1.14 and an upside of 22.9%). Currently, the company’s stock is trading at a P/E multiple of 10.86x and 10.21x on 2010E and 2011E earnings, and at a P/BV multiple of 0.77x and 0.78x on 2010E and 2011E BVPS, respectively. Meanwhile, the stock has declined 2.7% since the beginning of this year as against a loss of 5.5% posted by the Dubai Financial Market. Considering the above factors, we have arrived at a price target of AED 1.08, which represents an upside of 20.3% over its closing price of AED 0.90 (as on May 19, 2010). Accordingly, we are reiterating our earlier OVERWEIGHT recommendation on Air Arabia.

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