New Aircraft Will Expand Operations But Pose Financial Challenges

Key Takeaways

• The acquisition of AirSWIFT and fleet modernization enhance CEB's network and fuel efficiency, driving potential passenger revenue and margin expansion.
  
• Strategic growth at key hubs and share buyback efforts support revenue increases and demonstrate confidence in the company's valuation.
  
• Significant financial commitments for fleet expansion and operational challenges may impact net margins and profitability if market and regulatory conditions are unfavorable.

Catalysts

An airline, provides international and domestic air transportation services.

• The acquisition of 100% of AirSWIFT has expanded CEB's network into El Nido and allowed for potential upgauging of Manila slots to larger, higher revenue-generating aircraft, which is expected to enhance overall passenger revenue growth.
  
• The historic aircraft order with Airbus for up to 152 A321neo aircraft is part of a fleet modernization strategy that promises improvements in performance, fuel efficiency, and durability, contributing to potential future net margin expansion through cost efficiencies.
  
• CEB's strategy to expand and strengthen its market presence by boosting capacity at key regional hubs like Cebu, Clark, Davao, and Iloilo is expected to support tourism and business development, ultimately driving increases in revenue.
  
• The planned increase in operations and fleet utilization, combined with favorable airport infrastructure developments in the Philippines, positions CEB to capitalize on travel potential, supporting revenue growth and operational cost efficiencies leading to an increase in earnings.
  
• The share buyback program amendment to enhance shareholder value demonstrates confidence in undervaluation and is a strategic move to potentially improve earnings per share by reducing outstanding shares.

Cebu Air Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Cebu Air's revenue will grow by 10.8% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 5.7% today to 2.8% in 3 years time.
• Analysts expect earnings to reach ₱3.8 billion (and earnings per share of ₱2.13) by about February 2028, down from ₱5.6 billion today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 12.0x on those 2028 earnings, up from 3.4x today. This future PE is greater than the current PE for the PH Airlines industry at 8.4x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 19.09%, as per the Simply Wall St company report.

Cebu Air Future Earnings Per Share Growth

Risks

• The substantial aircraft order and acquisition of new aircraft, while a strategic growth move, involves significant financial commitments, potentially leading to increased debt and financing costs, which could negatively impact net margins and earnings.
  
• The reported decline in passenger and ancillary revenues, despite an increase in passengers, signifies challenges in maintaining revenue growth, potentially affecting overall revenues and profitability.
  
• Operational challenges such as Pratt & Whitney engine issues, which resulted in aircraft groundings, coupled with external disruptions like Typhoon Carina and software outages, may continue to affect operational reliability and revenue.
  
• While infrastructure improvements are promising, the necessity to pass on increased terminal fees to consumers could face regulatory challenges, potentially affecting future revenue if fee adjustments cannot be implemented.
  
• The heavy investment in fleet expansion and new routes creates initial financial pressure, and if market absorption of additional capacity is slower than expected, it could impact seat load factors and margins, thereby affecting earnings.

Valuation

• The analysts have a consensus price target of ₱43.25 for Cebu Air based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ₱133.6 billion, earnings will come to ₱3.8 billion, and it would be trading on a PE ratio of 12.0x, assuming you use a discount rate of 19.1%.
  
• Given the current share price of ₱29.95, the analyst price target of ₱43.25 is 30.8% higher. Despite analysts expecting the underlying buisness to decline, they seem to believe it's more valuable than what the market thinks.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.