VJC – Bumpy recovery – Update

• VJC posted VND180bn in 2Q22 net profit (versus VND6bn in 2Q21 NP), lower than our expectation as recovery was hampered by high fuel price.
• We lower FY22-23F EPS by 66.1%/47.6% following lower FY22-23F in’l pax (67.0%/13.3%) and higher FY22-23F jet fuel price (124.5%/74.0%).
• Downgrade to Hold with a lower TP of VND132,000 following (1) rolling DCF valuation to FY22F, and (2) downward revision of FY22-23F EPS.

2Q22 results: increasing fuel prices dented the traffic recovery

2Q22 VJC’s total pax increased 200.0% yoy thanks to the strong recovery of domestic air travel, leading to a 292.6% yoy increase in core revenue. However, VJC still recorded core gross loss of VND859bn (versus gross loss of VND1,279bn in 2Q21) mainly due to a 99.7% yoy surge in 2Q22 average Jet A1 fuel price. 2Q22 financial income decreased 86.4% yoy as VJC no more recorded profit from transferring real estate projects as it did in 2Q21, while 2Q22 financial expenses increased 427.2% yoy as (1) interest expenses increased 137.3% yoy due to total debt increasing 59.9% yoy, and (2) provision of investment of VND260bn in 2Q22 versus reversal of provision of VND45bn in 2Q21. Thanks to VND2,467bn revenue from S&LB activities with high gross margin (80.5%), VJC recorded VND180bn in 2Q22 NP (versus VND6bn in 2Q21 NP). 1H22 NP increased 242.1% yoy to VND424bn.

Recovery overshadowed by high fuel prices and tight financial situation

Following the recovery momentum, we expect VJC’s domestic pax to increase 245.4% yoy in FY22F with recovering travel demand. Growth may slow down to 12% yoy in FY23F from the high base of FY22F. In terms of international air traffic, we expect VJC’s international pax to reach 2.43m in FY22F (versus 0.1m pax in FY21), and may increase 223% yoy in FY23F to 7.83m pax (97,4% of FY19 base). However, recovery could be overshadowed by high fuel price and tight financial situation. We estimate VJC’s fuel cost/ASK to strongly increase in FY22F (+54.3% yoy) before cooling down 7.1% yoy in FY23F. Besides, VJC’s leverage ratio has increased and reached the highest level in the past 4 years, which may affect the fleet expansion plan in the coming periods.

Downgrade to Hold with a lower TP of VND132,000

We revise down our DCF-based TP (WACC: 8.69%) by 5.0% to VND132,000 as (1) we roll our DCF valuation to FY22F, and (2) we revise down FY22-23F EPS by 66.1%/47.6%. Due to limit upside, we downgrade VJC to Hold. Upside risk includes higher-than-expected international traffic recovery since FY22F. Downside risks include (1) geo-political uncertainties may affect global air transportation, (2) slower-than-expected construction of aviation infrastructure, and (3) higher-than-expected fuel price leading to higher operating cost.

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