BY AB CAPITAL SECURITIES
|AB Capital Securities
||6 Jan 2015
3rd Quarter revenues jump 32.4%
Cebu Air, Inc. (CEB) posted 3rd quarter 2014 revenues of PHP 11.7 billion (up 32.4% year-on-year) with the airline flying 4 million passengers (up 16.8% year-on-year) for the period. Despite the jump in revenues, net loss for the quarter widened to PHP 1.1 billion compared to PHP 750 million in the 3rd quarter.
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The loss was attributed to seasonality (third quarter is usually the weakest for local airlines) and foreign exchange and fuel hedging losses (PHP 1.09 billion loss). On a year-to-date basis, CEB’s 9-month 2014 revenues and net income improved to PHP 38.4 billion (up 25.7%) and PHP 2.0 billion (up 213.1%), respectively.
Bottom-line to improve on lower crude prices
Crude oil is currently hovering around $55-60/barrel, falling by $20 from our last report after low demand expectations and the reluctance of OPEC to cut production. The declining prices is seen as bullish for CEB, with fuel costs accounting for 40-50% of its total operating expenses.
In our model, we expect crude to average $70/barrel next year as it bounce back from its 5-year low. Historically, oil prices frequently bounce back after 6-7 months of continuous drop as market generally over reacts on supply and demand shocks/contractions.
CEB’s FINANCIAL AND VALUATION HIGHLIGHTS
Our Partner Broker’s Recommendation
We arrived at a Target Price for CEB of PHP 98.70 per share using a blended average of Discounted Cash Flows (DCF), EV/EBITDA and EV/EBITDAR multiples method implying a 14.96% upside from its last traded price. The upgrade in target price is mainly due to changes in crude price expectations.
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At this target price of PHP 98.70, CEB will be trading at 2015 Price-Earnings (P/E) Ratio of 8.8x and EV/EBITDA of 5.7x. We continue to remain bullish on CEB, being the leading low-cost carrier in the country, and benefiting from the country’s growing middle class market.