FX Rates Pose Major Risk
The author is an analyst of KB Securities. He can be reached at seongjin.kang@kbfg.com. -- Ed.
Maintain BUY but cut target price by 17.6% to KRW28,000
We maintain BUY on Korean Air but cut our TP by 17.6% to KRW28,000. Given a slowing cargo market, we lowered 2022E/2023E OP by 11.7%/6.1%. A 0.6pp increase in WACC also weighed on our TP. Our DCF-based TP (7.0% WACC; 3.4% TGR) implies 6.4x 12m fwd EV/EBITDAR, 1.1x P/B and offers 20.7% upside (vs. Oct 19 close).
3Q22 OP to increase 82.3%YoY to KRW764.2bn; above market consensus by 40.9%
For 3Q22, we expect OP to climb 82.3% YoY/3.2% QoQ to KRW764.2bn, fueled by a recovery in international passenger demand. We note that our estimate is 40.9% above the market consensus but 18.8% below our previous forecast. 3Q22 international RPK is projected to soar 354.1% YoY, boosting revenue by KRW924.8bn.
Cargo market peaked in 2Q22; supply/demand weighing on freight rates
The air cargo market peaked in 2Q22, as we expected. U.S. west coast port congestion, which has been one of the major causes of the global logistics crisis, has eased, reducing urgent demand for air transportation. In addition, growth in year-end shopping demand in developed countries is likely to be weaker than usual this year because of high inflation, thus global airlines appear to be competing with each other by cutting cargo rates as softening demand erodes load factors.
FX rates pose major risk
The major risk for Korean Air is FX rate fluctuations. As of end-2Q22, Korean Air held net foreign currency debt of KRW4.9tn, while Asiana Airlines, which Korean Air is set to merge with, holds KRW4.5tn. A 10% depreciation in KRW should lead to a combined FX translation loss of KRW940.0bn, dragging down BVPS by KRW1,933; we expect end-2022 KRW/USD at KRW1,410 and 2023 avg. of KRW1,280.