Additional Capital Expansion Likely
The author is an analyst of NH Investment & Securities. He can be reached at ys.jung@nhqv.com -- Ed.
Jeju Air continues to exhaust liquidity amid slow demand recovery. In light of the chances of additional capital expansion within 2022, we lower our TP on Jeju Air from W24,000 to W18,000. Pre-conditions for rating upgrade are: 1) easing liquidity concerns; and 2) recovering profitability on rebounding passenger airfares.
Lower TP to W18,000 to reflect downward earnings revision and rights offering
Reiterating a Hold rating, we lower our TP on Jeju Air by 25% from W24,000 to W18,000. The TP revision is a result of: 1) a 6% cut to our OP forecast for 2023 (the base year for TP calculation), in light of rising fuel costs and slower-than-expected demand recovery; and 2) a likely increase in the number of shares due to additional capital expansion within 2022. We expect a rights offering of W132.0bn within 2022 through the issuance of 12mn new shares at a price of W11,000/share, resulting in a 24.1% rise in the total number of shares versus end-2021.
At end-2021, Jeju Air received W150bn in financial support from Korea Development Bank (KDB), including W30bn worth of perpetual convertible bonds and W120bn from the Key Industry Stabilization Fund. But, its liquidity is ebbing away on delays in passenger demand amid the spread of the Omicron variant. While its profitability is forecast to rebound on a gradual passenger demand uptick and passenger yield growth from end-2022, the airline will likely need additional capital in order to remain afloat until demand bounces back.
Preconditions to turn the tide
Demand on domestic routes has stayed sound despite the spread of Omicron, indicating that the variant has had less impact than the Delta strain. In 4Q21, domestic flight demand and airfare rates jumped 31% y-y (RPK basis) and 19% y-y, respectively. We believe that 4Q21 operating losses narrowed (q-q) to W76bn.
For an investment rating upgrade, Jeju Air needs to: 1) ease liquidity concerns; 2) display visible margin improvement backed by airfare hikes; and 3) expand new routes by employing B737 MAX aircraft over the mid/long term. Depending on how the Korean Air-Asiana integration turns out, the competitive landscape of the LCC industry could be reshaped, centering on the firm’s direct competitor, Jin Air. Such a development could pose uncertainties for Jeju Air, the current number-one LCC operator.