Financial Structure Continues to Improve
The author is an analyst of NH Investment & Securities. He can be reached at ys.jung@nhqv.com -- Ed.
In 2Q21, KAL booked an earnings surprise thanks to its strong cargo business. We raise 2021E OP on an upward revision to cargo yield. Despite Covid-19 effects, KAL improved its financial structure by reducing its debt. Accordingly, the firm is likely to expand its market share in the process of a passenger demand recovery.
Raise 2021E OP due to strong cargo business; focus on financial structure improvement
We maintain a Buy rating and TP of W39,000 on Korean Air (KAL). Reflecting efforts to maximize cargo volume and strong air freight rates, we raise 2021E OP by 46% from W225.3bn to W329.9bn as we hike 2021E freight yield from 5.9% to 10.1%. There is no change in earnings estimates for 2023, the base year for our TP.
KAL continues to use the cash flow generated by its cargo business to reduce its borrowings. Non-consolidated financial liabilities fell W2.2tn from W15.3tn at end-2020 to W13.1tn at end-2Q21. While a large reduction in borrowings through a rights offering is expected in 2021, from a mid/long-term perspective, borrowings should decrease W0.5~1.0tn pa. The firm’s financial structure is improving even during the Covid-19 crisis. Based on this, KAL’s market share should expand in the process of a passenger demand recovery.
2Q21 results: Cargo earnings strengthen; interest expenses fall on reduced borrowings
In 2Q21, KAL’s earnings topped consensus, with sales of W2.012.6bn (+16.4% y-y) and OP of W193.6bn (+75.7% y-y; OPM of 9.6%). NP amounted to W115.6bn (-6.0% y-y) thanks to a sharp decline in net interest expenses (by W43.4bn y-y) to W68.9bn.
In 2Q21, changes in key indicators (y-y) were as follows: 1) passenger sales +5.3%, passenger available seat kilometers (ASK) +46%, revenue passenger kilometers (RPK) +48%, yield (won basis) -29%; and 2) cargo sales +23.2%, available freight tonne kilometers (AFTK) +21%, freight tonne kilometers (FTK) +29%, and yield (won basis) -5%. While passenger yield declined y-y due to high base effect, it increased 4.6% q-q. Despite a fuel cost increase of 133% y-y, labor and other operating costs were well controlled. The scale of operating losses at the hotel and aerospace divisions decreased on higher sales.
In 3Q21, domestic passenger demand and yield are expected to contract due to the spread of the delta variant and strengthened social distancing rules. However, the cargo business should remain strong backed by congestions in container shipping. We forecast 3Q21 OP of W71.3bn.