GulfBase GCC Cap Indices
IndexLevelChg%
Large Cap4,023 0.80
Med Cap3,850 0.49
Small Cap4,907 0.91
Micro Cap8,519 0.62

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Air Arabia Co.

Source: Global Investment House

• Net profit declined by 32.0%YoY in 2010
• Rising fuel prices weigh on earnings
• Healthy load factor lessened the impact of higher operating costs
• Attractive dividend yields

Improved load factor in 2010
The company reported revenues of AED2.08bn for 2010, a y-o-y increase of 5.5%, while gross profit witnessed a 13% decline y-o-y to reach AED311.6mn, a deviation of 0.4% from our AED312.8mn estimate. Margins were pressured during 2010 from higher fuel costs. However, improved load factors lessened the impact of higher operating costs. Load factor was 83% in 2010, compared to 80% in 2009, and slightly higher than our estimate of 82.5%. We expect a minor improvement in load factor in 2011, given the anticipated increase in capacity. Air Arabia will add 6 aircrafts to its fleet in 2011.

Net profit declined by 32% in 2010
Air Arabia posted net profit of AED309.6mn a y-o-y drop of 32% compared to AED452mn in 2009. Global estimated full year profit of AED344mn, a deviation of 11%. There has been a significant drop in profit on bank deposits which declined from AED156.2mn in 2009 to AED115.5mn in 2010. The share of net losses in associates (Morocco and Egypt) increased to AED37.9mn compared to a loss of AED31.6mn in 2009.

Valuation update
Owing to the current political turmoil in the region, we have added a 1% risk premium representing the political risk, resulting in a WACC of 11.75%. Consequently, we have downgraded our fair value from AED1.13 to AED0.95. The stock at its current price of AED0.80 still provides a potential upside of 18.6%. Our recommendation changed accordingly from STRONG BUY to BUY.

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