SEOUL, KOREA - ▶ Korean Air (KAL) posted 1Q13 K-IFRS sales of W2.9trn (down 1.9% YoY) and a larger operating loss of W123bn (1Q12 loss W99bn).The operating loss is the largest ever recorded in 1Q. Both passenger and cargo businesses reported operating losses. On the passenger side, Southeast Asia routes booked profits, but high-margin Japan routes suffered from reduced demand and increased competition, leading to losses. Meanwhile, the cargo division continued to report losses on sluggish demand.
▶ Despite a slow economy, international passenger demand has been growing rapidly. As such, a recovering in Japanese demand should rapidly lift earnings. Demand contracted due to growing tensions with North Korea, a deteriorating relationship with Japan and avian flu concerns, and these should continue to have a negative impact in Apr-May. However, the effects appear to be fading. In fact, average passenger load factor (L/F) in Apr-May appears to be in line with the same period last year (77.7%).
▶ Cargo demand has yet to recover, and should continue to weigh on sentiment. KAL is cutting supply to maintain yield, but the fixed cost burden remains high, leading to operating losses. Cargo is unlikely to turn profitable over the near term.
▶ We believe shares already reflect lower expectations for 2Q13 results. While sales should be flat in 2Q13, we believe the operating balance may improve on lower costs as jet fuel prices decline (USD112 per barrel, down 12% from 1Q13 average and 8% from 1Q12 average). We recommend BUY despite the low price merit. Of note, our TP was derived on Apr 9 based on EV/EBITDA (8.7x) and PB (1.04x) valuations.
*Source: Korea Investment & Securities Co.
