Cathay Pacific - 1H09 will see about HK$2b in fuel hedging write-backs

Write-backs of about HK$3.0b for 1H09. 2008 saw Cathay Pacific (CX) recognise unrealised fuel hedging losses of HK$7.6b as at end-08, when WTI crude oil price was US$44.70. As at end-June, WTI was US$69.80. Based on this, we estimate write-backs of about HK$3.0b for 1H09.

Mere accounting write-backs and not a cash flow item thus far. Market could react positively to the write-backs, given that consensus is estimating just HK$866m for 2009. We have estimated HK$1.4b for 2009 but we have not included any write-backs for 2010 and 2011. CX has hedged up to 2011. Book value will rise by HK$0.76 to HK$11.16. The stock price is now close to that level.

Write-backs are a moving target. If fuel price falls back to US$60/bbl, the estimate of HK$3b in write-backs will have to be adjusted down again.

We believe CX’s stock price would react ahead of results on expectation of write-backs. However, it is not logical to pay a premium for a seemingly random mark-to-market pricing of crude oil at US$69.80 as at end-Jun 09. We also expect CX to report an operating profit of HK$2.0b vs a HK$1.1b loss in 1H08. However, the improvement in earnings for 2009 will not be due to top-line growth but fuel cost savings. 2010 will also be a lacklustre year as we do not expect a significant improvement in yoy traffic growth. We still maintain our SELL recommendation on the stock and have a 12-month fair price of HK$9.57. We recommend readers to sell into any rallies. A potential resistance would be 1.1x P/B, or HK$12.30.

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