A Challenging Year Ahead

Downgrading stock to Hold and cut TP by 12% to AED1.11/share
Yields remain a concern as excess capacity and competition are issue at a time when fuel costs are rising; Air Arabia’s early summer fares are at a discount to competition’s cheap offerings
Downplaying impact of Morocco and Egypt hubs (12% of value) as we don’t expect them to contribute positively to numbers before 2012f

We downgrade Air Arabia to Hold from Buy and cut our TP by 12% to AED1.11 share (6% upside). Our change in view reflects sustained yield pressure, rising fuel costs, and the expected deployment of the majority of fleet additions at the Moroccan (29%-owned) and Egyptian (40%-owned) hubs. Air Arabia is trading at a 2010e P/E of 12.68x (a small 5% discount to peers) and an EV/EBITDA of 7.75x (a 13% premium to peers).

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