Stock down 4% post-results on earnings missCathay Pacific (CX) reported H115 net profit of HK$1.97bn, up from H114's HK$347m.An interim dividend of HK$0.26/share was announced. Please refer to Cathay Pacific:H115 profit misses our below-consensus forecast and page 3 of this note for the resultsanalysis.
We expect consensus to lower FY15 forecastsAt its analyst briefing, CX attributed the lower passenger yield (in order of significance)to a reduction in fuel surcharges, unfavourable FX moves, a higher mix of transit trafficand weak long-haul premium demand. We do not expect any turnaround in the nearterm. Air freight demand has been weak since Q215, and management remainspessimistic on its H215 outlook. On a positive note, CX thinks 2015 is the peak of itscapacity expansion. CX's earnings tend to rise substantially HoH but the currentconsensus forecast implies more than 250% growth, which is aggressive in our view.We see downside risk on Air China's contributionWe cut our 2015 passenger/cargo yield growth estimates from -6%/-6% to -9%/-12%,which is partly offset by a reduction in our pre-hedged jet fuel price assumption fromUS$65/bbl to US$60/bbl. Nevertheless, CX hedges 63%/60% of its H215/2016E fuelconsumption, which limits any immediate benefit of a lower oil price. Below the EBITline, we see downside risk to our 2015-17E investment income estimates from AirChina, given the latter's proposed A-shares placement could dilute CX's stake from20.1% to 18.7%.
Valuation: maintain Neutral but cut price target from HK$20.00 to HK$18.00We reduce our forward target P/BV from 1.35x to 1.2x, assuming a sustainable ROE of7.5% (previously 7.8%) and a COE of 6.5%. At our price target, the stock would betrading at its mean P/BV, which would also be justified by its slightly-above mid-cycleROE, in our view.