T'way Air
The author is an analyst for NH Investment & Securities. He can be reached at ys.jung@nhqv.com -- Ed.
T’way Air’s 2Q23 OP arrived short of consensus due to larger-than-expected fare rate decline amid the off-season. The possibility of a stake sale by a major shareholder is leading to a valuation discount. While maintaining a Hold rating, we lower our TP by 6%.
Lower TP by 6% to W3,300
While maintaining a Hold rating, we lower our TP on T’way Air by 6% to W3,300. Our TP is calculated by applying a target P/E of 7.8x to the average of 2023E and 2024F EPS. The target P/E applies a 20% discount to the 2023E~2024F average P/E of 9.8x for US and Korean LCCs, reflecting a possible stake sale by the second-largest shareholder.
2Q23 OP misses consensus due to larger-than-expected fare decline
T’way Air posted 2Q23 sales of W286.1bn (+205.3% y-y) and OP of W19.6bn (TTP y-y; OPM of 6.9%), with OP missing consensus by 36%. Although traffic volume was better than expected, earnings were impacted by a 23% q-q decrease in average international fare to W77/km. Despite the low season, demand remained robust on Japanese routes. However, fares slid for Southeast Asian routes on intensifying competition. In 3Q23, we expect higher volumes and fares on the entering of peak seasonality, although fares are unlikely to surpass the 1Q23 levels. We assume an average 3Q23 international fare of W85/km.
Conditions for rating upgrade: Resolution of overhang issue and visible European route expansion
Based on the Jul 24 closing price, T’way Air’s market cap stands at W603bn, somewhat below that of Jin Air, which has a relatively smaller operating fleet. We point out overhang pressure from the possible sale of the second-largest shareholder’s stake as a discount factor. But, opportunities exist for a reduction in discount given the potential growth of the firm’s European route portfolio as part of the KAL-Asiana Airlines acquisition. If the overhang issue is resolved, or if mid/long-haul route expansion becomes visible, a rating upgrade could be in the cards.