1H15 net profit HKD2.0bn, up six-fold y-o-y due to lower fuel costs plus higher Air China contribution
Passenger business likely to stay strong in 2H15 and cargo soft; we make no change to our forecasts
Maintain Buy at an unchanged TP of HKD22
1H15 recurring net profit forecast was HKD2.0bn, up about six-fold y-o-y and 7% below HSBC’s forecast (which was in line with consensus). The main driver of the rise in profit was lower fuel costs (down 12% y-o-y) plus a HKD1.0bn rise in contributions from associates which reflects the improvement in Air China’s profits in 4Q14-1Q15. Largely as a result of the lower fuel surcharges and to extent a stronger HKD/USD, passenger and cargo yields fell 9% and 11% y-o-y in 1H15, passenger was slightly worse and cargo slightly better than expected. The result was below our forecast due tohigher fuel costs (hedging losses were higher than expected),an unexpected HKD101m loss on disposal of fixed assets and these negatives were offset at the pre-tax level by a higher than anticipated associate contribution. The effective tax rate was well above forecast.
Management expects a seasonally better 2H15 and for the airline to perform well.The passenger business is expected to remain strong and the cargo tostay soft (although management has little visibility on the latter). Cathay will also likely benefit from lower fuel and non-fuel unit costs. Cathay has 63% of 2H15 hedged a USD91/bbl for Brent oil. We make no change to our forecasts which are in-line with consensus for 2015e and 25% above for 2016e.
Maintain Buy at a TP of HKD22.0.Since 2000, Cathay Pacific has traded at an average one-year forward book value of 1.25x. Given our forecast of normalising ROE, we believe Cathay’s PB level should return to this average; and if we apply this to our one-year forward EPS, we get our target price of HKD22.0. After the recent share price decline, Cathay Pacific offers 32% potential return. Weargue that Cathay Pacific’s strong home base, which we believe is the best positioned gateway into Southern China, and its greater exposure to North America mean that the carrier has a stronger medium-term outlook than its Asian full service rivals.