P/B valuation is more than one standard deviation below historical mean
The stock has declined 19% over the last three months on the back of macrofears in HK/China. At 0.8x P/B, the stock is close to its historical trough of0.62x, and one of the cheapest airlines in the region. Lower fuel prices will helpdrive 35% forecasted earnings growth for this year. In contrast to its Chinesepeers, CX is not as badly affected by RMB weakness. 2H 2015 results, to beannounced in March, should be significantly stronger y/y and h/h. We think thisis a good time to Buy the stock.
Lower fuel price offset by downward yield pressure
We have chosen not to change earnings forecasts despite recent jet fuel costdeclines as we worry about the yield erosion and how much of the fuel pricegain the airline will have to give back to consumers. Nevertheless, weacknowledge that there is upside risk to our 2016-17E forecasts should jet fuelprice stay at current levels.
ROEs are still forecasted to be a healthy 12% over 2016-2017E
We expect to see a 20% y/y net profit rise in 2H 2015E net profit as fuel costsavings start to be evident. Our 2016-2017E net profit forecasts are 12% / 10%ahead of Bloomberg consensus respectively.
TP revised up 5%; key risk : fuel price and currency volatility
We are rolling over to use end 2016E BVPS to derive TP (from mid 2016Epreviously). However, we are maintaining our 1.1x P/B multiple as we have notchanged earnings forecasts. Our TP is based on an ROE forecast of 12% in2016E that is above its cost of equity of 7.4% (2.7% risk free rate, 4.9% equityrisk premium and 0.9 beta). Downside risks: downward pressure on passengeryields, partially driven by unfavorable currency movements. Regionally, weexpect Cathay Pacific share price to outperform SIA and hence a pair tradeseems like a good idea. Cathay’s ROE of 12% is superior to SIA’s, while its2016E P/B is 20% lower.