Brighter outlook for rest of 2011

Air Arabia’s 1Q11 results suffered on the back of higher fuel prices and its inability to offset un-hedged fuel exposure via surcharges. Revenue grew 6.5% YoY to AED513m, 4% below our estimate of AED533m and that of consensus of AED536m. The bottom line, coming in at AED44m, was also disappointing, down 12% YoY and 40% QoQ. Passenger numbers grew 11% YoY, exactly in line with our estimate of 1.15m. Load factor was strong at 85%, and COGS rose 11% YoY and 8% QoQ owing mainly to increased fuel costs, which resulted in gross margin narrowing to 7%, down 3.5pps YoY. The remainder of 2011 should be brighter, as robust load factors are likely to lead to the imposition of fuel surcharges to match oil price spikes, thereby lifting yield and margins. We maintain our TP at AED1.0 but raise our call to BUY.

Fair value maintained at AED1/share, but raising call to BUY. We believe that after a difficult 1Q11, Air Arabia can come through 2011 with a healthy load factor and enhanced yields. We also continue to hold the opinion that Air Arabia’s longer-term prospects remain attractive, and therefore maintain our TP at AED1.0, but raise our call to BUY (from ACCUMULATE).

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