Mitigates Liquidity Risk
The author is an analyst of NH Investment & Securities. He can be reached at ys.jung@nhqv.com. -- Ed.
Thanks to sound air cargo market conditions, KAL remains able to generate operating cash flow. We expect the firm to enjoy M/S expansion on the back of business downsizing at domestic and overseas peers. Against this backdrop, we raise our investment rating and TP for KAL.
Mitigating liquidity risks
Resuming our coverage on Korean Air (KAL), we raise our investment rating to Buy and revise up our TP from W20,000 to W27,000. Our TP is derived by applying a target P/B of 1.4x to 2020E~2022F weighted average BPS. We apply a 30% premium to global FSCs’ 2020E average P/B in light of KAL’s robust profitability and strong M/S even in the face of the Covid-19 crisis.
KAL has successfully secured liquidity via business disposal, rights offering, and government support. Hanjin International Corp (HIC)’s borrowings have also been successfully rolled over. Combined, these efforts have helped the firm to mitigate liquidity risks. We believe that its cash generating capabilities through cargo business will help the firm to weather the Covid-19 crisis. Against this backdrop, we remove our previously-applied valuation discount and apply a premium in consideration of the strong earnings at the cargo business.
M/S to rise in both international passenger and cargo markets
While the majority of airlines have undertaken drastic measures to cut fixed-cost burden, including operating fleet reductions and workforce restructuring, KAL boasts sound fundamentals to help it weather the current crisis without restructuring (via obtaining liquidity and generating healthy operating cash flows). Affected by business downsizing during the pandemic, competition in the air passenger market should lessen once Covid-19 is gone.
Korea is currently serving as a stopover for cargo shipped from Southeast Asia to North America. Thanks to its strong North American route portfolio, KAL is one of only a few global airlines to see FTK climb during the pandemic.
We estimate KAL’s 3Q20 sales at W1,769bn (-47.7% y-y) and OP at W29bn (-70.2% y-y; OPM of 1.6%), with OP remaining sound despite reduced passenger sales. The firm’s NP is projected at W133.1bn, backed by forex translation gains in line with US dollar weakening. In 4Q20, the firm’s OP is predicted to rise further on peak seasonality at the air cargo business.