Prepared for Post-pandemic World
The author is an analyst of NH Investment & Securities. He can be reached at ys.jung@nhqv.com -- Ed.
We upwardly adjust 2021E earnings for KAL on continuing strong air freight yield in 2H21. International passenger yield is rising amid recovering air passenger demand for US routes, and passenger demand is moving from standard class towards premium class. KAL’s financial structure is also strengthening in line with reduced borrowings. Anticipating long-term earnings growth, we raise our TP from W39,000 to W43,500.
Push up 2021E OP on strong cargo yield; focus on financial structure improvement
Adhering to a Buy rating, we raise our TP on Korean Air (KAL) by 12% from W39,000 to W43,500, reflecting: 1) favorable air freight yield (y-y yield growth estimate: +10.1% → +17.7%); 2) an ongoing 2H21 recovery in demand for mid/long-distance routes (3Q21E RPK: +31% y-y); and 3) likely long-term yield level expansion in response to rising premium class passenger demand. We boost 2021E OP by 171% from W329.9bn to W892.4bn.
Our TP calculations are based on consolidated earnings forecasts for 2023 (when passenger demand should fully recover), and we also take into account KAL’s acquisition of Asiana Airlines. We applied a target P/B of 1.7x to 2023F combined capital of W10tn, discounting it to present value by applying 8.6% of the cost of capital.
Korea’s number-one operator prepared for post-pandemic world thanks to cargo business
Thanks to its robust air freight business, KAL can generate profits even during a pandemic. Amid continual disruptions in container shipping due to port congestion in 3Q21, air freight yields have risen again as freighter supply has decreased since mid-August, responding to both border closures in major Southeast Asian countries and operating disruptions at Shanghai Airport. In addition to profit growth, the strong performance of KAL’s cargo business should translate into tangible positives, including reducing borrowings and the introduction of new aircraft over the mid/long term.
In August, passenger demand for US routes rebounded to 30% of the average monthly passenger volume seen in 2019, showing a swifter recovery compared to other routes. KAL’s estimated load factor for international routes in 3Q21 is 37.5%, the highest among domestic airlines. Considering global vaccine supply, demand recovery is likely to start mainly with mid/long-distance routes, centering on US and Europe.
Strong passenger yield is also noteworthy. We estimate a 14% q-q widening in 3Q21 international passenger yield (won basis). In addition to the higher demand for US routes, this strong yield growth is being supported by an increasing preference for business class. Amid recovering demand as the Covid-19 crisis fades, KAL’s international passenger yield should continue to climb, reaching 19% higher in 2023 than in 2019.