Expectations Rising
The author is an analyst of NH Investment & Securities. He can be reached at ys.jung@nhqv.com -- Ed.
KAL logged consensus-topping 1Q21 results thanks to robust cargo volume and yield despite the absence of a passenger demand rebound. As of 2Q21, the ongoing cargo upcycle remains strong. Having secured the ability to endure Covid-19, KAL is now entering a phase of rising expectations towards passenger demand recovery.
Strong cargo yield to sustain at least through 3Q21; passenger demand to gradually recover from 2H21
We hike our estimate for Korean Air (KAL)’s 2021 OP from W18.4bn to W127.5bn in reflection of a sustained strong cargo yield trend. Specifically, we upwardly adjust 2021E cargo yield from US$40.7 to US$46.3 per freight tonne kilometer and cargo sales by 10% to W4.9tn. Overall, the upward revision to earnings estimates mainly stems from earnings improvement at the cargo division despite sluggish sales at the aerospace, hotel, and passenger divisions.
Amid ongoing brisk global trading volume, container shipping rates have leveled up once again. Due to port congestion and a decline in shipping efficiency, air cargo demand is expanding rapidly. Despite cargo supply increase stemming from increased passenger flights (passenger aircraft carry cargo in their belly), robust cargo yield continues thanks to strong air cargo demand in excess of supply. We expect this situation to continue through at least 3Q21.
With expectations rising for passenger demand recovery, KAL is enjoying limited concerns towards additional capital expansion and dilution of shareholders’ value thanks to cash inflow from capital increase, sales of non-operating assets, and revenue generation at the cargo business. In 2H21, backed by expanded vaccine supply, passenger flight resumption should continue, with passenger demand gradually climbing over 2H21~2023.
1Q21 review: Endures again thanks to cargo
KAL’s 1Q21 results slightly topped both consensus and our estimates with sales of W1.79bn (-26.2% y-y) and OP of W101.6bn (TTP y-y; OPM of 5.7%) on the back of stronger-than-expected cargo yield. On a y-y basis, passenger and cargo business indicators changed as follows: ASK -71%, RPK -90%, passenger yield (won based) +27%, AFTK +16%, FTK +30%, and cargo yield (won based) +60%. On the non-operating side, despite forex translation losses, KAL recorded a net loss of only W53.7bn (better than consensus) thanks to the reflection of profits from derivatives investment.
In 2Q21, passenger demand recovery is still progressing slowly. However, KAL should continue to log OP thanks to cargo yield on par with the 1Q21 level.