Air Arabia’s performance in 3Q2007 was outstanding. Yield increased by 12% compared with 2Q2006, and load factor reached 92%. Also, Air Arabia’s EBITDAR margin reached 42% in 3Q2007, a margin most airlines in the world do not even dream of achieving. Net income for 3Q2007 was AED 165 million, which is 146% higher than 2Q2007.
The financial results posted by Air Arabia in the third quarter of 2007 exceeded our expectations and those of the market in general—as evident from the spike in the share price following the earnings release. The 3Q2007 results are exceptional and the only reason they are not better is the fact that Air Arabia only had nine aircraft during that
period.
We have revised our forecasts for Air Arabia over the short-term. Due to this change, our 12-month fair value estimate for the share price of Air Arabia increased 15.6% from our previous estimate to AED 1.76. This change was driven primarily by a 31% increase in the fair value using the peer comparison method based on forward PEG multiples; which was primarily a result of a 27% increase in our forecast of Air Arabia earnings per share (EPS) for 2008. On the other hand, the value derived from our discounted cash flow (DCF) model increased by 6.5%, mainly due to lowering the cost of equity from 13% to 12.7% to reflect recent changes in the risk-free rate. Since our fair value estimate is 2.8% lower than Air Arabia’s latest share price, our new recommendation for Air Arabia’s stock is “Hold.”


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