• Expect 1Q18 core profit to grow 66% yoy on low-base effect; yield improved stronger than our expectations
• Raised FY18F earnings after reflecting higher yield; growing international supply could pressure yield in low travel season
• Maintain NEUTRAL, revised TP Bt6.2 (from Bt6.1); rising jet fuel prices and 2Q low travel season to tame share price

1Q18 profit should grow qoq/yoy on peak season and low base    

We expect AAV to report Bt708m core profit for 1Q18 (+77% qoq, +66% yoy). Passenger revenue should grow 16% qoq and 22% yoy to Bt9.3bn driven by 16% RPK growth with 90% cabin factor (+2ppt qoq, +1ppt yoy). Yield should improve 11% qoq and 5% yoy due to peak travel season in 1Q and low base last year; that is higher than our previous expectation of +1% yoy, thanks to softer competition on domestic routes. Ancillary revenue per PAX should improve by c.1% yoy driven by dynamic pricing for pre-booked baggage and in-flight F&B. Fuel cost/ASK should jump c.12% yoy, slower than 21% growth for jet fuel price as it is partly offset by 10% stronger baht. Non fuel cost should rise 13% yoy following a bigger fleet size (59 aircraft vs 53 in 1Q17). That is lower than an increase in ASK (+15%) due to higher utilization of 12.7 hours per day (vs 11.9 in 1Q17) and stronger baht. Including Bt40m FX gain, net profit should grow 57% qoq and 31% yoy to Bt748m. 

Challenging to maintain high yield and cabin factor in low season

We revised up FY18F earnings by 30% after imputing higher passenger yield to Bt1.58/RPK (+4% yoy from +1%) to reflect anticipated stronger 1Q18 yield. According to OAG, Thailand domestic capacity should slightly drop by c.0.3% yoy in 2018 while AAV (31% market share) is expanding their domestic seats by c.14%. Thai Lion Air (19% share) should maintain their capacity, while NOK (19%) and Thai Smile (10%) are reducing their seats. We hence foresee softer competition at domestic market and AAV should be able to increase yield with high cabin factor. However, industry-wide and Asia-Pacific cabin factor slipped down in Jan, while yields continued to move sideways based on IATA. This implied international capacity grew faster than demand. Despite of anticipated higher international yield and cabin factor in 1Q18F supported growing Chinese inbound, it would be challenging to maintain that in 2Q and 3Q low season. Moreover, there are downside risks from rising fuel price and weaker baht. Note that the baht appreciates by Bt1 should offset a US$4/bbl increase in fuel price.

Risk/rewards profile still unattractive

We revised up TP to Bt6.20/sh (from Bt6.10), based on 1.3x FY18F P/BV. The stock has outperform the SET by 17% MTD and now trading at regional peers’ average (17x FY18F PE). Its strong 1Q18F results should be priced in, while that of 2Q18F would be weaker qoq on low travel season. We believe AAV’s share price will continue to be pressured by rising jet fuel price. Despite Thailand’s booming tourism industry, it would be challenging to pass on higher cost to price-sensitive passengers and maintain high utilization.