2022 Forecast: OP of KRW1.2tn (-0.9% YoY)
The author is an analyst of KB Securities. He can be reached at seongjin.kang@kbfg.com. -- Ed.
Maintain BUY; raise target price 5.3% to KRW40,000
We maintain BUY on Korean Air and raise our TP by 5.3% to KRW40,000. Upward revisions to oil price projections should undermine earnings in the long run, but we raise our TP because WACC fell 0.7pp and air freight market conditions have been better than expected. Derived using the DCF model (4.7% WACC; 2.2% TGR), our TP represents 11.8x EV/EBITDAR, 1.70x P/B, offering 47.1% upside (vs. Nov 26 close).
Investment points: (1) Record-high earnings expected to beat consensus (2) Improvement in market conditions for passenger flights expected
The main highlights for Korean Air are:
(1) OP should remain at record-high levels for the time being (expected to exceed market consensus by 12.4% in 2021 and 15.6% in 2022) and
(2) market conditions for passenger flights are expected to improve; recovery is currently only seen in U.S.-bound traffic, but non-tourist demand and long-haul demand seem to be rebounding, contrasting airlines from shipping companies.
2022 forecast: OP of KRW1.2tn (-0.9% YoY), 15.6% above consensus
We forecast 2022 OP at KRW1.2tn (-0.9% YoY), which is 15.6% above the market consensus. We see the company resuming operations of its aircraft, particularly passenger planes running international routes, which are expected to boost international passenger RPK (+654.6% YoY) and OP (+KRW3tn). Annual OP contributions from consolidated subsidiaries should jump KRW283.2bn, largely thanks to the consolidation of Asiana Airlines in 1Q22. Meanwhile, we see various fluctuations in rates (-24.8% YoY in freight rates) pulling OP down KRW3tn.
Risk factors
We believe Korean Air is exposed to the following risks:
(1) Annual OP falling KRW126.5bn for every USD10.00/bbl rise in fuel price.
(2) OP falling KRW41.1bn for every 1% shortcoming in cargo FTK/rates.
(3) OP taking a KRW11.2bn hit for every KRW10 increase in KRW/USD rate.