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Air Arabia

Source: Taib Bank

Quarterly Result Update

Air Arabia reported a 5.0% YoY increase in revenue to AED 967.40 million during 1H10, compared to AED 921.65 million during 1H09.

Net profit fell 49.0% YoY to AED 98.36 million from AED 193.04 million.

We have maintained our FY2010E sales. However, we have revised the net profit estimate downwards by 37.0%, in anticipation of higher fuel costs.

We are reiterating our OVERWEIGHT recommendation on Air Arabia with a revised DCF target price of AED 1.12, implying an upside of 32.8%.

Profitability
Gross profit declined 45% YoY to AED 88.26 million. Gross margin also fell to 9.1% from 17.4% during the prior year period. Similarly, EBITDA plunged 55.4% to AED 55.98 million from AED 125.57 million, while EBITDA margin fell 784 bps YoY to 5.8%. Overall, net profit declined 49.0% YoY to AED 98.36 million from AED 193.04 million, hit by the one-off cost related to the commencement of Egyptian operations and the joint venture in Jordan. Net profit margin dipped significantly to 10.2% from 20.9%. Adjusted annualised EPS stood at AED 0.04 compared to AED 0.08.

We had updated Air Arabia on May 19, 2010 with an OVERWEIGHT recommendation (target price of AED 1.08 and an upside of 20.3%). Currently, the company’s stock is trading at a P/E multiple of 16.28x and 11.80x on 2010E and 2011E earnings, and at a P/BV multiple of 0.74x and 0.76x on 2010E and 2011E BVPS, respectively. Meanwhile, the stock has declined 8.8% since the beginning of this year as against a loss of 6.3% posted by the Dubai Financial Market. Considering the above factors, we have arrived at a price target of AED 1.12, which represents an upside of 32.8% over the closing price of AED 0.84 (as of September 23, 2010). Accordingly, we are reiterating our earlier OVERWEIGHT recommendation on Air Arabia.

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