Cebu Air, Inc.

WED 15 MAY 2019

1Q19 earnings beat estimates on

lower-than-expected opex
CEB: 1Q19 earnings beat estimates on lower-than-expected opex. CEB’s 1Q19 net income
grew 138.4% to Php3.4Bil. However, CEB booked non-core items such as forex losses, hedging
gains and gains due to sale of aircraft amounting to a Php749Mil gain in 1Q19 and a Php514Mil
BUY
loss in 1Q18. Excluding these, 1Q19 core net income reached Php2.7Bil, up 37.2% y/y. Results
ended ahead of both COL and consensus estimates at 44.9% and 35.9% of full-year forecasts TICKER: CEB
respectively. Note that 1Q core net income over the last three years averaged at 31% of full year FAIR VALUE: 99.00
net income. The beat in our forecast was mainly due to the lower-than-expected operating
expenses. CURRENT PRICE: 83.00
UPSIDE: 19.28
Higher fares and passenger volume boost revenues. CEB’s 1Q19 revenues grew 16.0% y/y
to Php21.2Bil, in line with both COL and consensus estimates at 25.1% and 25.2% of full year
forecast respectively. The growth in revenues was attributable to the 8.5% increase in passenger SHARE PRICE MOVEMENT
volume to 5.3Mil, ahead of capacity growth of 6.0%, and 7.1% increase in total yield to Php3,731
per passenger. Broken down, average tickets increased by 5.7% to Php2,965 while ancillary
110
revenue per passenger increased by 13.1% to Php767. Moreover, 1Q19 cargo revenues rose
12.7% to Php1.4Bil, on the back of an 11.4% increase in yield to Php28/kg.
100
Moving forward, we expect revenues to continue growing despite the flight interruptions that
the company recently announced. Recall that CEB said that it will be reducing 10 flights a day, out
of a daily operations of ~400 flights due to unprecedented level of disruptions to its operations. 90
We estimate that the impact of this event will only be minimal as the cancelled flights account
for just ~2% of the company’s estimated total number of flights. Moreover, the reopening of
Boracay island, and expected arrival of bigger and more fuel efficient aircrafts in the second half 80
of the year should provide a boost to revenues. Note that the company guided a capacity growth 15-Feb-19 15-Mar-19 15-Apr-19 15-May-19
of 14% for 2019. CEB PSEi

Reiterate BUY rating . We currently have a BUY rating and FV estimate of Php99.0/sh on CEB. We
continue to like CEB given the relatively lower jet fuel prices and its fleet/capacity expansions.
Moreover, valuations remain attractive. At its current price of Php82.3/sh, the stock is currently ABSOLUTE PERFORMANCE
trading at 5.5X 2019E EV/EBITDA, a discount compared to the regional average of 8.7X.
1M 3M YTD
CEB -1.25 -4.10 13.32
FORECAST SUMMARY
PSEi -1.25 -2.76 3.01
Year to December 31 2016 2017 2018E 2019E 2020E 2021E
Revenues 61,899 68,029 72,402 84,537 97,517 105,552
% change y/y 9.55 9.90 6.43 16.76 15.35 8.24
EBITDA 18,250 16,974 12,725 16,201 19,212 21,712 MARKET DATA
% change y/y 23.21 (6.99) (25.03) 27.31 18.58 13.02
EBITDA Margin (%) 29.48 24.95 17.58 19.16 19.70 20.57 Market Cap 149,876.57Mil
Core Income 11,233 8,698 3,996 5,961 7,875 9,579 Outstanding Shares 601.28Mil
% change y/y 17.39 (22.56) (54.06) 49.20 32.10 21.63 52 Wk Range 61.25 - 91.30
Core Income Margin (%) 18.15 12.79 5.52 7.05 8.08 9.08
3Mo Ave Daily T/O 13.77Mil
Net Income 9,754 7,908 3,996 5,961 7,875 9,579
% change y/y 122.33 (18.93) (49.47) 49.20 32.10 21.63
Net Income Margin (%) 0.16 0.12 0.06 0.07 0.08 0.09
EPS (cents) 16.10 13.05 6.61 9.90 13.08 15.91
% change y/y 122.38 (18.94) (49.32) 49.66 32.10 21.63

Relative Value
P/E(X) 5.16 6.36 12.55 8.38 6.35 5.22
P/BV(X) 1.50 1.26 1.22 1.08 0.94 0.82 FRANCES ROLFA NICOLAS
ROE (%)* 33.53 23.74 9.88 13.66 15.89 16.83 RESEARCH ANALYST
Dividend Yield (%) 2.41 3.31 5.42 1.59 2.39 3.15
rolfa.nicolas@colfinancial.com
*based o n co re inco me
so urce: CEB , COL estimates

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 EARNINGS ANALYSIS I CEB: 1Q19 EARNINGS BEAT ESTIMATES ON LOWER-THAN-EXPECTED OPEX

WED 15 MAY 2019

CEB: 1Q19 earnings beat estimates on lower-than-expected

opex

CEB’s 1Q19 net income grew 138.4% to Php3.4Bil. However, CEB booked non-core items such
as forex losses, hedging gains and gains due to sale of aircraft amounting to a Php749Mil
gain in 1Q19 and a Php514Mil loss in 1Q18. Excluding these, 1Q19 core net income reached
Php2.7Bil, up 37.2% y/y. Results ended ahead of both COL and consensus estimates at 44.9%
and 35.9% of full-year forecasts respectively. Note that 1Q core net income over the last three
years averaged at 31% of full year net income. The beat in our forecast was mainly due to the
lower-than-expected operating expenses.

Exhibit 1: Results Summary

% of estimates
1Q18 1Q19 % change
COL consensus
Revenues 18,261 21,177 16.0 25.1 25.2
Operating Expenses 15,997 17,345 8.4 22.8 -
Operating Income 2,264 3,832 69.3 44.5 38.4
Net Income 1,437 3,426 138.4 - -
Core net income 1,951 2,677 37.2 44.9 35.9
Net Margin (%) 10.7 12.6 - - -
source: CEB, COL Estimates, Bloomberg

Higher fares and passenger volume boost revenues

CEB’s 1Q19 revenues grew 16.0% y/y to Php21.2Bil, in line with both COL and consensus
estimates at 25.1% and 25.2% of full year forecast respectively. The growth in revenues was
attributable to the 8.5% increase in passenger volume to 5.3Mil, ahead of capacity growth of
6.0%, and 7.1% increase in total yield to Php3,731 per passenger. Broken down, average tickets
increased by 5.7% to Php2,965 while ancillary revenue per passenger increased by 13.1% to
Php767. Moreover, 1Q19 cargo revenues rose 12.7% to Php1.4Bil, on the back of an 11.4%
increase in yield to Php28/kg.

Moving forward, we expect revenues to continue growing despite the flight interruptions
that the company recently announced. Recall that CEB said that it will be reducing 10 flights
a day, out of a daily operations of ~400 flights due to unprecedented level of disruptions to
its operations. We estimate that the impact of this event will only be minimal as the cancelled
flights account for just ~2% of the company’s estimated total number of flights. Moreover, the
reopening of Boracay island, and expected arrival of bigger and more fuel efficient aircrafts in
the second half of the year should provide a boost to revenues. Note that the company guided
a capacity growth of 14% for 2019.

COL Financial Group, Inc. 2

 EARNINGS ANALYSIS I CEB: 1Q19 EARNINGS BEAT ESTIMATES ON LOWER-THAN-EXPECTED OPEX

WED 15 MAY 2019

Exhibit 2: Passenger volume

in Php Thousands 1Q18 1Q19 % change
Passengers carried 4,876 5,289 8.5
Capacity 5,905 6,260 6.0
source: CEB

Exhibit 3: Total yield volume breakdown

1Q18 1Q19 % change
Average fare 2,805 2,965 5.7
Ancillary 678 767 13.1
Total Yield 3,483 3,731 7.1
source: CEB

Opex up 8.4% y/y, fuel expense flat y/y on lower jet fuel prices

Operating expenses in 1Q19 grew by 8.4% to Php17.3Bil mainly due to higher depreciation
and general and administrative expenses. Fuel expense, which accounts for the biggest
portion of the company’s opex (~40%), was flat at Php5.9Bil as higher fuel consumption and
weakening of the peso was offset by the drop in jet fuel prices. Note that the average jet fuel
price in 1Q19 was 3.9% lower at US$74.7/bbl, vs. the 1Q18 average of US$77.7/bbl. Meanwhile,
the Philippine peso depreciated by ~1.7% to an average of Php52.4/US dollar (from Php51.5/
US dollar) during the quarter.

Moving forward, we expect opex to improve given the relatively lower oil prices compared
to last year, and delivery of bigger and more fuel efficient aircrafts as mentioned above. Note
that the average jet fuel price from April 1- May 13 is at US$80.3/bbl, down 5.1% from the
US$84.6/bbl average in 2Q18. Moreover, the company has received its first A321neo aircraft,
which has 31% higher capacity than previous generation aircrafts (A320ceos). In addition, the
neo generation aircrafts are equipped with new engine choices, which bode to deliver per seat
fuel improvements of 20%. For the rest of the year, CEB is scheduled to receive 5 additional
A321neos and 5 A320neos.

Exhibit 4: Fuel costs

1Q18 1Q19 % change

Fuel Expense 5,853 5,881 0.5
Average jet fuel price per barrel (USD) 77.7 74.7 (3.9)

source: CEB, COL estimates

COL Financial Group, Inc. 3

 EARNINGS ANALYSIS I CEB: 1Q19 EARNINGS BEAT ESTIMATES ON LOWER-THAN-EXPECTED OPEX

WED 15 MAY 2019

Reiterate BUY rating

We currently have a BUY rating and FV estimate of Php99.0/sh on CEB. We continue to like CEB
given the relatively lower jet fuel prices and its fleet/capacity expansions. Moreover, valuations
remain attractive. At its current price of Php82.3/sh, the stock is currently trading at 5.5X 2019E
EV/EBITDA, a discount compared to the regional average of 8.7X.

COL Financial Group, Inc. 4

 EARNINGS ANALYSIS I CEB: 1Q19 EARNINGS BEAT ESTIMATES ON LOWER-THAN-EXPECTED OPEX

WED 15 MAY 2019

Cebu Air, Inc. (CEB) INCOME STATEMENT (IN PHPMIL)

2016 2017 2018E 2019E 2020E 2021E

Revenues 61,899 68,029 72,402 84,537 97,517 105,552
% Growth 9.6% 9.9% 6.4% 16.8% 15.4% 8.2%
COMPANY BACKGROUND
Operating Profit 12,251 10,134 5,843 8,606 10,812 12,599
Cebu Pacific (CEB) is the leading low-cost % Growth 26.3% -17.3% -42.3% 47.3% 25.6% 16.5%
carrier in the Philippines, operating a fleet Interest Expense 1,170 (1,422) (2,039) (2,667) (2,894) (2,968)
of 67 as of end 9M18. The business model Other Income/Expense (402) (505) 343 260 275 333
Pretax Income 9,716 8,208 4,148 6,199 8,192 9,964
of CEB aims to make travel more affordable
Tax Expense (38) 300 152 238 317 385
by offering unbundled products to Net Income 9,754 7,908 3,996 5,961 7,875 9,579
passengers. It boasts of high-load, high- % Growth 122.3% -18.9% -49.5% 49.2% 32.1% 21.6%
frequency flights; high aircraft utilization; EPS 16.1 13.1 6.6 9.9 13.1 15.9
a young and simple fleet composition % Growth 122.3% -18.9% -49.3% 49.7% 32.1% 21.6%

and low distribution costs. The company

currently serves 36 domestic destinations BALANCE SHEET (IN PHPMIL)
and 28 international destinations through 2016 2017 2018E 2019E 2020E 2021E
104 routes and 2,583 weekly flights. Cash & Equivalents 10,296 15,614 11,815 12,483 15,117 15,306
Trade Receivables 2,127 1,900 2,182 2,548 2,939 3,181
Inventories
Other Current Assets 2,728 4,177 4,100 4,477 4,839 5,120
REVENUE BREAKDOWN PPE 81,890 81,279 98,924 111,544 121,334 130,867
Other Non-Current Assets 3,473 6,106 6,297 6,577 6,876 7,196
Total Assets 100,514 109,077 123,317 137,629 151,106 161,671
19% Accounts Payable 12,584 14,183 16,513 18,910 21,668 23,200
ST Debts 7,040 5,969 5,767 6,825 7,704 7,813
Other Current Liabilities 8,204 9,094 9,671 11,285 13,012 14,081
6% LTPassenger
Debts 35,770 35,013 45,051 48,806 49,890 49,372
CargoNon-Current Liabilities
Other 3,411 5,032 5,252 5,575 5,921 6,291
Ancillary
Total Liabilities 67,009 69,291 82,255 91,401 98,195 100,757
Total Equity 33,505 39,786 41,063 46,227 52,910 60,914
75% Total Liabilities & Equity 100,514 109,077 123,317 137,629 151,106 161,671
BVPS 55.3 65.7 68.0 76.8 87.9 101.1

CASHFLOW STATEMENT (IN PHPMIL)

Passenger 2016 2017 2018E 2019E 2020E 2021E
Net Income 9,716 8,208 4,148 6,199 8,192 9,964
Cargo
Depreciation & Amortization 5,999 6,839 6,882 7,594 8,400 9,113
Ancillary Other Non-Cash Exp (Gains) (104) (1,295) (1,852) (2,645) (2,936) (3,020)
Interest Expense (Income) 1,057 1,239 1,695 2,407 2,620 2,635
75% Decrease (Increase) in Working Cap 1,693 1,490 2,928 3,591 4,077 2,447
Operating Cash Flow 18,360 16,480 13,801 17,147 20,352 21,139
Capex (19,126) (14,776) (30,961) (21,160) (21,971) (24,318)
Other Investments 2,066 5,988 6,244 666 3,482 5,352
Investing Cash Flow (17,060) (8,789) (24,717) (20,495) (18,489) (18,966)
Proceeds (Payment) Debts 4,278 8,903 9,836 4,813 1,963 (409)
Payment of Cash Dividends (1,212) (1,666) (2,718) (797) (1,192) (1,575)
Others - - - - - -
Financing Cash Flow 3,066 7,237 7,118 4,016 771 (1,984)
Change in Cash 4,366 14,929 (3,798) 668 2,634 189

COL Financial Group, Inc. 5

 EARNINGS ANALYSIS I CEB: 1Q19 EARNINGS BEAT ESTIMATES ON LOWER-THAN-EXPECTED OPEX

WED 15 MAY 2019

INVESTMENT THESIS: KEY RATIOS

Market leader in the domestic space 2016 2017 2018E 2019E 2020E 2021E
EBITDA Margin (%) 29.5% 25.0% 17.6% 19.2% 19.7% 20.6%
CEB is currently the leader in the domestic
OPM (%) 19.8% 14.9% 8.1% 10.2% 11.1% 11.9%
space, having the higherst market share NPM (%) 15.8% 11.6% 5.5% 7.1% 8.1% 9.1%
at 53% as of 9M18. The closest competitor Times Interest Earned (X) 10.5 7.1 2.9 3.2 3.7 4.2
trails far behind with just a 31% market Current Ratio (X) 0.5 0.7 0.6 0.5 0.5 0.5
share. CEB plans to offer inter-island flights Net D/E Ratio (X) 1.0 0.6 0.9 0.9 0.8 0.7
Days Receivable 12.5 10.2 11.0 11.0 11.0 11.0
and routes, which would be a driver of
Days Inventory - - - - - -
growth as Manila airports are already Days Payable 105.2 101.4 101.0 101.0 101.0 101.0
congested. We believe that this would be Asset T/O (%) 70% 10% 0% 0% 10% 10%
ROAE (%) 30% 20% 10% 10% 20% 20%
lucrative especially with the Department
of Tourism’s aggressive campaigning to
MAJOR CORPORATE DEVELOPMENTS (5-YEARS)
attract more tourists as well as the incoming
President’s thrust to develop provincial areas. CEB acquired 100% ownership of Tiger Airways Philippines 3/20/2014

Peso depreciation to hamper earnings

Approximately 65% of CEB’s operating
expenses and 70% of CEB’s loans are
denominated in US dollars. Any further
weakening of the peso could lead to higher
costs and forex losses, which would cause a
downward pressure on the company’s earnings.

COL Financial Group, Inc. 6

 EARNINGS ANALYSIS I CEB: 1Q19 EARNINGS BEAT ESTIMATES ON LOWER-THAN-EXPECTED OPEX

WED 15 MAY 2019

Valuation RELATIVE VALUATION

P/E EPS Growth
Methodology 2019E 2020E 2019E 2020E
Spring Airlines Co. Ltd. 14.2 11.6 27.0% 22.5%
Asia Aviation PCL 14.8 13.1 41.9% 13.3%
VietJet Aviation JSC 9.6 7.0 23.7% 35.9%
Juneyao Airlines Co. Ltd 12.3 9.6 20.0% 28.9%
InterGlobe Aviation Ltd 17.0 12.3 441.8% 37.8%
Cebu Air Inc. 8.4 6.4 49.7% 32.1%
Industry Ave 12.7 10.0 100.7% 28.4%
Industry Median 13.3 10.6 34.4% 30.5%

VALUATION ASSUMPTIONS
For DCF
Risk Premium 5.0%
Risk Free Rate 6.5%
Beta 2.00
Cost of Equity 16.5%
Cost of Debt 5.8%
Tax Rate 4.0%
WACC 12.2%
Terminal Growth Rate 2.0%

PV (FY17E-FYXXE) 20,674
PV of Terminal Value 77,952
Enterprise Value 98,626
Less: Net Debt -39,003
Add: Other Investments 0
Equity Value 59,623
O/S 602
FV Estimate 99.00

COL Financial Group, Inc. 7

 EARNINGS ANALYSIS I CEB: 1Q19 EARNINGS BEAT ESTIMATES ON LOWER-THAN-EXPECTED OPEX

WED 15 MAY 2019

IMPORTANT RATING DEFINITIONS

BUY
Stocks that have a BUY rating have attractive fundamentals and valuations based on our analysis. We expect the share price to outperform the market in the next six to
12 months.

HOLD
Stocks that have a HOLD rating have either 1) attractive fundamentals but expensive valuations 2) attractive valuations but near-term earnings outlook might be poor
or vulnerable to numerous risks. Given the said factors, the share price of the stock may perform merely in line or underperform in the market in the next six to twelve
months.

SELL
We dislike both the valuations and fundamentals of stocks with a SELL rating. We expect the share price to underperform in the next six to12 months.

IMPORTANT DISCLAIMER
Securities recommended, offered or sold by COL Financial Group, Inc. are subject to investment risks, including the possible loss of the principal amount invested.
Although information has been obtained from and is based upon sources we believe to be reliable, we do not guarantee its accuracy and said information may be
incomplete or condensed. All opinions and estimates constitute the judgment of COL’s Equity Research Department as of the date of the report and are subject to change
without prior notice. This report is for informational purposes only and is not intended as an offer or solicitation for the purchase or sale of a security. COL Financial and/
or its employees not involved in the preparation of this report may have investments in securities of derivatives of the companies mentioned in this report and may trade
them in ways different from those discussed in this report.

COL RESEARCH TEAM

APRIL LYNN TAN, CFA

VP & HEAD OF RESEARCH
april.tan@colfinancial.com

CHARLES WILLIAM ANG, CFA GEORGE CHING RICHARD LAÑEDA, CFA

DEPUTY HEAD OF RESEARCH SENIOR RESEARCH MANAGER SENIOR RESEARCH MANAGER
charles.ang@colfinancial.com george.ching@colfinancial.com richard.laneda@colfinancial.com

ANDY DELA CRUZ JOHN MARTIN LUCIANO FRANCES ROLFA NICOLAS

SENIOR RESEARCH ANALYST SENIOR RESEARCH ANALYST RESEARCH ANALYST
andy.delacruz@colfinancial.com john.luciano@colfinancial.com rolfa.nicolas@colfinancial.com

JUSTIN RICHMOND CHENG ADRIAN ALEXANDER YU

RESEARCH ANALYST RESEARCH ANALYST
justin.cheng@colfinancial.com adrian.yu@colfinancial.com

COL FINANCIAL GROUP, INC.

2402-D EAST TOWER, PHILIPPINE STOCK EXCHANGE CENTRE,
EXCHANGE ROAD, ORTIGAS CENTER, PASIG CITY
PHILIPPINES 1605
TEL NO. +632 636-5411
FAX NO. +632 635-4632
WEBSITE: www.colfinancial.com

COL Financial Group, Inc. 8