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Air Arabia Co

Source: Shuaa Capital

Q4 2008 First Reaction

Profits exceed our estimates: Air Arabia announced its preliminary results for Q4 08, reporting net profits of AED136mn, 40.2% higher that our expected profits of AED97.02mn. Reported results imply a 36.5% decrease QoQ (however excluding the one off item of dividend income in Q3 08, this drop is 14.0% QoQ) but a 51.9% increase YoY. The decrease in QoQ results was expected given the drop in revenues due to 1) the seasonality of the industry in general, 2) the drop in oil prices, which resulted in falling airfares as airlines started to withdraw surcharge. However in terms of profitability, net profit margin dropped to 24% in Q4 08 vs. 34% and 26% in Q3 08 and Q4 07, respectively, however still higher than our forecast.

Revenue drop QoQ: Revenues at AED571mn, in line with our estimates, were lower than AED625 in the previous quarter but higher than AED349mn in same quarter of the previous year. Air Arabia transported almost 0.95mn passengers in Q4 08 which was slightly lower than 0.98mn transported in Q3 08. This fall, however, reflects a seasonal trend for Air Arabia where the third quarter of the year is generally the period with the highest load factor, which reached 85% in Q4 08 vs. 87% in Q3 08. The implied revenue per passenger was AED601 in Q4 08 vs. AED638 and AED469 in Q3 08 and Q4 07, respectively.

Drop in operating cost: The company managed to cut down costs exceeding the assumptions made in our forecast. While the revenues came inline with our estimates, they exceeded our forecasted net profits. In the absence of the detailed figures, we do not think that Air Arabia has booked any one off items, and, therefore, assume that the variation was a result of lower operating cost and higher profitability margins than we estimated.

Proposal of cash dividends: The company is proposing a 0.10 per share cash dividend, which translates into an11% dividend yield and an 84.2 payout ratio.

Outlook: Air Arabia, in its statement today, acknowledged that the year ahead is a challenging one. In any case, profitability and the cost side of the business were our major concern a few months back, especially fuel cost - the highest component of total cost. While costs will remain a concern, oil prices dropping to levels below USD 40 a barrel have taken off a lot of pressure on the profitability margins of airline companies. The challenge will come from the demand side of the business; growth in passenger traffic will drop in the current global conditions, accentuated by the economic slowdown and the population decrease in the UAE, putting pressure on load factors and break even load factor. We reiterate our belief, based on the price elasticity of demand, that there will be a shift in passenger traffic from conventional airlines to low cost carriers, making the latter slightly immune to the slowdown.

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