Direction towards Earnings Improvement Clear
The author is an analyst of NH Investment & Securities. He can be reached at ys.jung@nhqv.com -- Ed.
Although trimming down our valuation expectations on concerns towards a mid/long-term slowdown in consumption, we still see sufficient catalysts in place for Jin Air’s share price, including likely higher earnings on both improved demand (in line with the resumption of Japan routes) and mid/long-term LCC integration.
Eye level lowered, but direction towards earnings improvement is clear
Although maintaining a Buy rating, we lower our TP on Jin Air by 9% from W23,000 to W21,000. We upwardly adjust our 2022 and 2023 OP projections by 47% and 1%, respectively, reflecting both an ongoing demand recovery and favorable passenger fees. Our new TP reflects a downward adjustment to a 2023F P/E for global LCC peers from 15x to 13x. Although trimming down our valuation expectations on concerns towards a mid/long-term slowdown in consumption, we still anticipate both higher earnings (in line with the rebound in demand) and mid/long-term low-cost carrier (LCC) integration.
The PCR test system for inbound travelers abolished in early September, and visa-free travel to Japan is expected to resume from October. The company looks set to turn to the black from 2H22 in response to rising demand for travel to Japan, a key and highly profitable short-distance route. We believe that Jin Air will be the fastest among low-cost airlines to turn to profit q-q based upon the optimizing of its operating scale to meet current demand. We forecast 3Q22 sales of W173.8bn and OP of W900mn.
Offers most stable financial structure among low-cost airlines; to lead mid/long-term LCC integration
As of end-2Q22, Jin Air’s short-term financial assets and cash equivalents amounted to W160.9bn, and it possessed capital of W116.1bn—we view these levels as being satisfactory. Considering the effect of deferred tax in addition to operating surplus in 2H22, net losses should prove limited. Capital has likely decreased due to redemption of perpetual bonds (W75bn, issued in Aug 2021), but given that Korean Air, the new parent company, possesses sufficient financial resources, Jin Air is expected to issue new perpetual bonds for recapitalization purposes. Thus, the chances of capital erosion appears low. It is unlikely in our view that Jin Air will opt for a rights offering for recapitalization since there remains too little time to complete the rights offering process within 2022. We have no concerns towards liquidity shortage as advance deposits continue to flow in amid the ongoing expansion in demand for travel.
Upon confirmation of a takeover of Asiana Airlines by Korean Air, the integration of Jin Air, Air Busan and Air Seoul is expected to proceed sequentially. We anticipate that integrated Jin Air will become Korea’s number-one low-cost carrier by securing more than 10% of the overseas airline market share. And, considering that Jin Air has strength in operating international flights out of the Seoul metropolitan area and Air Busan has strength in operational international flights out of the southeast region of Korea, favorable synergies should be in play.