Expanding Air Travel Network Will Boost 25% Seat Capacity

Key Takeaways

• Strategic expansion and operational enhancements may drive revenue growth and improve net margins through increased customer satisfaction and efficiency.
  
• Declining fuel costs and a strong peso may lower operating expenses, boosting net income margins due to currency exchange benefits.
  
• Increased financing costs, currency depreciation, and rising competition may pressure Cebu Air's margins, revenue, and financial stability despite higher revenue.

Catalysts

An airline, provides international and domestic air transportation services.

• Rapid expansion of Cebu Air's network, including new routes and increased capacity in both domestic and international markets, may drive revenue growth as more passengers are reached and seat load factors improve.
  
• Strategic investments in hubs, fleet expansion, and operational improvements are expected to enhance reliability and customer experience, potentially improving net margins through increased customer satisfaction and efficiency.
  
• Optimization of capacity and a focus on value and affordability could strengthen earnings as Cebu Air captures more market share and meets growing travel demand with a projected 25% increase in seat capacity for 2025.
  
• Cebu Air’s response to industry challenges, such as investing in additional aircraft and engines, positions the company for greater operational resilience, potentially contributing to improved net margins as maintenance and engine reliability issues are mitigated.
  
• Favorable economic indicators, like declining fuel prices and a strengthening peso, could lower operating costs and improve net income margins, given that a significant portion of costs are pegged to the U.S. dollar.

Cebu Air Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Cebu Air's revenue will grow by 11.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from 4.5% today to 6.2% in 3 years time.
• Analysts expect earnings to reach ₱8.9 billion (and earnings per share of ₱7.37) by about April 2028, up from ₱4.7 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 5.8x on those 2028 earnings, up from 4.5x today. This future PE is lower than the current PE for the PH Airlines industry at 11.3x.
• 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

• Despite increased revenue, Cebu Air's net income for the quarter was lower than the previous year due to the non-recognition of tax benefits from net operating losses, which could impact future earnings consistency.
  
• The company faces higher financing costs due to increased net debt, which could negatively affect net margins and overall financial stability.
  
• The depreciation of the peso against the US dollar can adversely affect costs, as a significant portion of expenses and debt are pegged to the dollar, potentially reducing net margins.
  
• Capacity expansion has led to softened average fares, which might pressure revenues if the market does not absorb the additional capacity quickly enough.
  
• Competitive dynamics, particularly with low-cost competitors in the Philippines, might continue to apply pressure on fares, impacting overall revenue growth potential.

Valuation

• The analysts have a consensus price target of ₱49.333 for Cebu Air based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ₱60.0, and the most bearish reporting a price target of just ₱43.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ₱144.3 billion, earnings will come to ₱8.9 billion, and it would be trading on a PE ratio of 5.8x, assuming you use a discount rate of 19.1%.
• Given the current share price of ₱34.1, the analyst price target of ₱49.33 is 30.9% higher.
• 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.