Our 2015 profit forecast is 8% below consensus
Cathay Pacific (CX) will report 2015 results on 9 March. Our 2015 net profit forecast ofHK$4.95bn implies a H215 profit of HK$2.98bn, up only 6% YoY. We think CX onlypartially benefited from the sharp fall in the spot oil price due to its expensive fuelhedges and pass-through via a reduction in fuel surcharges and discounting underlyingfares.
Watch for yields and fuel hedges at the results
We forecast the passenger yield decline will accelerate from 9.3% in H115 to 9.7%YoY in H215, due to the reduction in fuel surcharges and weaker underlying yield inthe premium classes. On the cost front, we estimate H215 fuel cost net of hedging lossto fall 17% YoY versus 12% in H115. We expect CX to book a reduction in cash flowhedges after accounting for the realised loss transfer to the P&L of cHK$2.2bn in H215,which represents c5% of our 2015E book value.
Share price has priced in near-term concerns
The shares have fallen 10% in the past three months. At 0.86x 2016E book value (withunrealised hedging loss accounted for), or one standard deviation below mean, wethink the current valuation has priced in the near-term outlook. Nevertheless, we thinkCX continues to face stiff competition, which supports our 2016E net profit decline andis a major obstacle for the stock to trade above the mean P/BV of 1.1x.
Valuation: maintain HK$13.00 price target; upgrade from Sell to Neutral
Our price target is based on 0.9x target P/BV, assuming a 6.2% sustainable ROE.