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MENA airlines | Improving industry dynamics; Jazeera our pick

Supportive dynamics for airlines coverage. Thanks to supply disruptions on the regional and global fronts, Middle East (ME) RPK growth for 2019 is expected to outpace capacity additions, which has been supportive of higher passenger growth (>9% y-o-y in 9M19a) and improved yields (>7%) for our coverage. ME LCCs growth should also continue to outperform FSCs, we believe, as they further expand their market share (17% in 2018 from 9% in 2009). This, in addition to forecasted oil price stability at cUSD60/bbl, means ME listed airlines are set for a decent ride through 2020e (2018-20e NI CAGR average c40%). Beyond 2020e, we expect current industry tailwinds to fade. As such, medium-term growth will depend on company-specific drivers.

Jazeera: Our pick on sustainable growth; Initiate with Overweight. We believe Jazeera’s high growth phase is set to continue (2018-21e NI CAGR of 49%), thanks to the supportive demographics (expats represent c70% of Kuwait’s population) and solid positioning as the only LCC out of Kuwait. The carrier is set to almost double its fleet to 17 aircraft by 2022e. This, coupled with ramp-up of the company’s terminal operations (>60% EBITDA margin, c20% of NI), should further augment profitability, leading to sustainably high RoAE (c40-70%). Jazeera trades on a 2020e P/E of 12.6x, falling to 9.7x by 2021e, which we find attractive, in light of its superior growth profile, lucrative profitability, and the higher earnings multiples for terminal operators at c20-25x (double airlines’ average). Expected inclusion in the MSCI Small Cap index in May-20 should attract flows of cUSD15mn (c30DTT).

Air Arabia: Current performance difficult to sustain; Maintain Neutral. Air Arabia is on track to report outstanding metrics for the remainder of 2019e and 2020e (2018-20e NI CAGR of 29%), benefiting from temporary industry tailwinds, namely flydubai’s partial fleet grounding on the Boeing 737 MAX crash, the exit of Jet Airways, and the Expo 2020. We expect profits to drop starting 2021e, back to more normalised levels, which will place the stock on a 2021e P/E of 10.7x (7.6x 2020e P/E), broadly in line with peers. Accordingly, we maintain our Neutral rating. Beyond 2019, the dividend story gains traction, at c8-9% yield.

Yields and oil are key risks. Airlines are sensitive to changes in yields, with every 1% flat drop in rev/pax knocking off c8% off our valuation for Air Arabia and 4.5% for Jazeera, all else constant. Meanwhile, every USD5 flat increase in Brent vs. our base case of cUSD60-63/bbl over the forecast horizon shaves 14% of Air Arabia’s valuation and 11% for Jazeera, all else constant.