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Air Arabia results disappoint

|By TAP Staff| Air Arabia results have disappointed market consensus, due to lower margins, but analysts see the airline continuing to focus on expansions in the future.

According to Mubasher Trade (MTRe) analysts, despite the disappointing Q3 2015 results, they maintain BUY/MODERATE RISK rating for the company with a price target of AED2.06/share and expected total return of +62%.

Revenues increased by 6% YoY to AED1.12 billion in Q3 2015, up from AED1.06 billion in Q3 2014, beating MTRe and market consensus of AED1.07 billion (+4.7%) and AED1.08 (+3.7%), respectively. The increase in revenues came on the back of routes expansion which reached 115 routes as the company is implementing its expansion strategy, including the opening of a fifth international hub in Jordan. This strategy significantly increased the number passengers by 18% YoY with more than 2 million passengers served in Q3 2015.

In Q3 2015, yields were down 10.4% YoY to AED562 compared to AED627 in Q3 2014 due to increased competition, which offset the improvement triggered by the growth in passenger numbers. Consequently, operational margins were negatively impacted as gross profit margin (GPM) reached 35% in Q3 2015, a decline of 263bps YoY but in line with the analyst estimates of 35%. The impact of the decline in yields was carried forward to the EBITDA level, as EBITDA was down by 8.6% YoY in Q3 2015 at AED345 million compared to AED378 million in Q3 2014, yet beating the estimate of AED319.7 million by 7.9%. EBITDA margin decreased significantly by c.480bps YoY in Q3 2015 to 30.7%, due to a higher SG&A-to-revenues ratio which reached 3.8% in Q3 2015 up from 1.6% in Q3 2014.

Earnings declined 7% YoY in Q3 2015 on lower margins. Net profits in Q3 2015 came in at AED231mn, marking a 7% YoY decline but in line with our estimates (MTRe) of AED224 million (+3%) yet missing consensus of AED291 million by 22%. Despite the major decline in losses of derivatives (the main one-off item) to AED29.6 million in Q3 2015 from AED68.9 million in Q3 2014, the company reported lower net profit margin by 270bps to reach 20.6% in Q3 2015, down from 23.3% in Q3 2014, reflecting significant margins decline.