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Air Arabia still a good stock to hold.

As expected, the share price of Air Arabia, the biggest discount airline in the region, took a beating shortly after the company announced a healthy dividend of seven fils a share, on the back of a 55 per cent jump in full-year profit for 2012.

Investors had been waiting to take the dividend and then book the gains. In the past month the share has declined more than nine per cent and is currently trading at Dh0.83.

But despite it being seen as a dividend play, Air Arabia can continue to grow earnings and increase the value of its shares, according to some analysts. Much of their optimism is based on profit margins improving as the airline adds additional capacity, in the form of six or seven new aircraft, this year. Others are more conservative in their predictions.

Air Arabia registered a net profit of Dh405 million for 2012. In a February report, Goldman Sachs increased their 2013-14 net profit estimate "by five to six per cent on improved earnings before interest, tax, depreciation and amortisation (EBITDA), lower costs and increased capacity.

"We forecast a marginal increase in ticket prices - five per cent for 2013-14 - for the low-cost carrier, along with a 10 per cent growth in passengers," wrote analysts Eyad Faraj and Matija Gergolet. "As a result, we now expect a seat load factor of 84 per cent, the highest since 2008. With capacity additions and lower fuel costs, we forecast an EBITDA margin improvement to 21 per cent in 2014."

As for the first quarter earnings, Securities and Investment Company (SICO) analyst, Nishit Lakhotia, expects to see growth in revenues and steady EBITDA margins. He is projecting Dh715 million this quarter, which is a significant jump from Dh622 million in the first quarter last year. "EBITDA margins have improved in the last two three quarters and they have been pretty successful in managing costs and maintaining healthy margins," Lakhotia said.

In the first quarter of 2012, the company also had a derivatives gain of about Dh30 million and booked dividend income.

"Based on the oil price movement, I don't think there will be a major derivatives impact either way, because the oil price has been at a similar level quarter on quarter," said Lakhotia.

Investment bank Arqm Capital expects double digit revenue growth in the first quarter, because of resilient passenger numbers. "This is evidenced by Sharjah airport [passenger] growth of 14 per cent year-on-year in January and February," said analyst Mohammad Kamal.

He added: "Relatively cheap aircraft financing costs will continue to support earnings before income and tax, net margins and return on equity, as the business remains underleveraged and highly liquid."

However Kamal also pointed out that Air Arabia's growth will be challenged by competition from domestic and other low-cost carriers.

"Nevertheless Air Arabia's multiple hub network across the Middle East and North Africa may prove to be a successful response to incoming competition in the medium term," Kamal added.

Lakhotia remains cautious about operations at the hubs: political turmoil is continuing in Egypt and expansion has been slow in Morocco due to limited rights to fly to African countries.

"That needs to be cleared for the hubs to start contributing positively to the bottom line," he says. "They have accumulated losses."

He believes the majority of the capacity exapnsion will be added to Sharjah, with a possibly one addition in Morocco during 2013. The company will take delivery of of six new aircraft in 2013 and will also be simultaneously retiring about four aircraft, so the net capacity addition should only be two planes.

According to Lakhotia, after a solid 2012, incremental growth this year is going to be a challenge. "I am not sure if there's going to be any significant year-on-year growth," he said. " I would rather be conservative and wait for the company to show a better performance than what they have [already] done."

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Publication:Gulf News (United Arab Emirates)
Date:Apr 15, 2013
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