Travel Restrictions Expected to Ease from 4Q21
The author is an analyst of KB Securities. He can be reached at seongjin.kang@kbfg.com. -- Ed.
Raise TP 40.9% to KRW31,000; Maintain HOLD
We revise up our TP for Korean Air by 40.9% to KRW31,000 as: (1) we no longer apply discounts in our long-term OP forecast as vaccinations ramp up; (2) issue price for the rights offering exceeded expectations; and (3) air cargo demand has been stronger than forecast. Our DCF-based TP (5.7% WACC, 2.2% TGR) equates to a 12m fwd P/B of 1.64x and EV/EBITDAR of 10.73x. We maintain HOLD, however, as our new TP suggests a downside of 3% (vs. May 31 close) despite the upward revision.
Key investment points: (1) Travel restrictions to ease from 4Q21; (2) Air cargo competition to ramp up; (3) Spending on goods to slow
Our investment points are as follows: (1) Travel restrictions are expected to ease from 4Q21. (2) Competition in the air cargo segment should intensify as passenger flight operations increase. (3) Increased air travel demand should undermine spending on consumer goods. In 2022, international air passenger traffic is projected to recover to 55% of the 2019 level with upside signals emerging from 4Q21. Meanwhile, 2022 air cargo freight rate and volume are forecast to decline 26.5% YoY and 5.0% YoY, respectively, due to stronger competition amid an increase in passenger flight operations by competitors and softer growth in consumer goods spending amid higher travel demand.
2021E and 2022E OP to beat consensus by 55.6% and 22.0%, respectively
For 2021, OP is forecast to balloon 262.6% YoY to KRW395.0bn, 55.6% above consensus, on a sharp reduction in labor costs and the robust cargo business. We project 2022E OP at KRW663.8bn (+68.1% YoY; 22.0% above consensus). Passenger revenue growth should more than offset negatives, including a decrease in cargo revenue and higher costs.
Risks: (1) Delays in passenger demand recovery; (2) Stronger-than-expected air cargo market
Risks include the following: (1) A recovery in passenger demand may be delayed due to unexpected factors (i.e., emergence of new COVID-19 variants). (2) Air cargo freight rate and volume may be stronger than anticipated if consumer spending on goods continue to expand rapidly despite increased travel demand.