• Global values Jazeera stock at KD0.333 and recommends a HOLD on the stock
Global Investment House – Kuwait –Jazeera Airways K.S.C – Results Update Report- The year 2008 has been a turbulent year for the airline industry in general given skyrocketing oil prices witnessed throughout the majority of the year. However, Jazeera airways ended 2008 with a 94% growth in net profit reaching KD4.5mn owing to a one-off gain of KD5.5mn from the sale of six aircrafts to Al Sahaab Aircraft Leasing Company. Excluding the one-off gain and forex losses of KD1.1mn, the company would have reported a net profit of KD0.018mn in 2008.
Our valuation for the stock is supported by a combination of DCF Method and Relative Valuation Method. Under the DCF method, we have arrived at a fair value of KD0.349. For relative valuation, we have used an EV/EBITDAR multiple of 5.0x, which resulted in a fair value per share of KD0.268 based on forecasted EBITDAR for FY2009. Assigning an 80% to the DCF value and 20% to the relative value, we have reached a fair value for Jazeera Airways of KD0.333 per share and given the stock's closing price of KD0.320 per share on May 24 2009, the stock is trading at 4.1% above the fair value. Therefore, we revise our earlier "Buy" recommendation on Jazeera Airways’ stock to "Hold".
Financial Performance
Jazeera airways reported revenues of KD48.7mn in 2008 growing by 40% from KD34.7mn in 2007. Passengers increased by 18% in 2008 to reach 1.39mn passengers compared to 1.18mn in 2007. The airline increased its fleet by two A320 aircrafts in 2008 bringing the total size of its fleet to 10 aircrafts. In 2007, the airline had placed an order with Airbus for 40 brand new A320s of which it had received 8 aircrafts by the end of 2008. The airline is expected to add another two aircrafts to the fleet by this summer. The last fleet installment is scheduled for delivery in 2014. During Q4 2008, Jazeera sold 6 aircrafts to Al Sahaab Aircraft Leasing Company under a sale and leaseback agreement. Sahaab Leasing is Jazeera's aircraft leasing unit, launched in October 2008.
The company's ASK (Available Seat Kilometer), a measure of supply, stood at 3.09bn in 2008, while RPK (Revenue Passenger Kilometer), a measure of demand, stood at 2.08bn, leading to load factor or a capacity utilization rate of 67.2% in 2008compared to a load factor of 73.6% in 2007. Going forward, though ASK is expected to increase significantly according to Jazeera's new aircraft delivery schedule. However, we expect a slower rate of growth for RPK leading to lower load factors going forward.
Chart: RPK, ASK, and Load Factors
Source: Jazeera Airways, Global Research
Excluding the one-time gain from the sale of the 6 aircrafts, and forex income, EBITDA margin declined from 18.3% in 2007 to 15.6%% in 2008, while EBITDAR margin declined from 18.3% to 16.5%. During 2008, the airline starting reporting lease rentals. Lease rentals as the company leased back 6 aircraft sold to Sahaab Leasing Company. Lease rentals stood at KD0.445mn in 2008, and are expected to increase going forward in line with expected expansion in the airline’s fleet.
The company’s debt to equity ratio declined considerably in 2008 to reach 1.13 compared to 2.04 in 2007. In our previous report on Jazeera Airways, we pointed out that high debt levels to support the company's fleet expansion were a cause of concern. However, the company’s funding for new aircrafts is currently being raised by Jazeera's aircraft leasing unit, Sahaab Leasing. The sale-leaseback agreement is expected to free up cash considerably for the company.
Jazeera recorded a marginal loss of KD0.9mn for Q1 2009. The company announced that it registered KD10mn in revenues for Q1 2009, and that the loss was attributable to heavy investments in operations.
Outlook
We expect the year 2009 to be a tough year for the airline industry in general and Jazeera airways in particular. The global financial crisis, the economic slowdown, increasing competition, and the recent regulations which halted the airline’s direct flights from its second hub in Dubai are expected to affect the airline’s passenger growth in 2009. In addition, declining oil price and increasing competition will pressure yields as fuel surcharges will decline and airlines compete in offering the lowest fares to attract travelers. However, on the upside, with the economic downturn and the decline in consumer spending, low cost carriers (LCCs) might be in higher demand than other conventional airlines, which will lessen the impact for LCCs.
The company is expected to launch a third hub. We strongly believe that this is an essential step for the company’s future growth plans following the recent regulations which weakened the company’s second hub in Dubai. The company’s sale-leaseback agreement will provide the necessary liquidity to pursue further investments to expand its operations. According to the company, they are targeting Q4 2009 to launch the third hub; however, the company did not disclose the location.
