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Korea Daily Focus December 19, 2019 Korea Daily Focus Company News & Analysis Jeju Air (089590/Buy/TP: W36,000) Raise TP Killing three birds with one highly efficient investment This document is a summary of a report prepared by Mirae Asset Daewoo Co., Ltd. (“Mirae Asset Daewoo”) and published on our website. Please review the compliance notices contained in the original report. Information and opinions contained herein have been compiled in good faith from sources deemed to be reliable. However, the information has not been independently verified. Mirae Asset Daewoo makes no guarantee, representation or warranty, express or implied, as to the fairness, accuracy or completeness of the information and opinions contained in this document. Mirae Asset Daewoo accepts no responsibility or liability whatsoever for any loss arising from the use of this document or its contents or otherwise arising in connection therewith. Information and opinions contained herein are subject to change without notice. This document is for informational purposes only. It is not and should not be construed as an offer or solicitation of an offer to purchase or sell any securities or other financial instruments. This document may not be reproduced, further distributed or published in whole or in part for any purpose. Jeju Air (089590 KS ) Killing three birds with one highly efficient investment Airlines Jeju Air announces acquisition of Eastar Jet Company Report On December 18 th , Jeju Air announced that it had signed a memorandum of December 19, 2019 understanding to acquire a 51.17% stake in Eastar Jet for W69.5bn (subject to change after due diligence). The deal values Eastar Jet at W135.8bn, implying a P/S ratio of 0.24x based on 2018 estimates, which is less than half of Jeju Air’s multiple (0.58x). Even when accounting for Eastar Jet’s financial position, which is believed to be nearing full impairment of capital, we believe the deal’s valuation is inexpensive. (Maintain) Buy Meanwhile, Jeju Air said it would issue W10bn worth of convertible bonds in a private Target Price (12M, W) ▲ 36,000 offering (interest rate of 1% and conversion price of W25,520). The bonds will mature on April 6, 2025 and become convertible on April 6, 2021. Dilution will be minimal, as the Share Price (12/18/19, W) 27,700 company’s share count will increase by only 391,849 shares (1.46%) once the conversion is complete. As the bonds are being issued to Eastar Jet’s largest shareholder, the actual Expected Return 30% cash outflow from the acquisition will be around W59bn, which we believe is fairly manageable, given Jeju Air’s current cash position (W320bn as of end-3Q19). Killing three birds with one stone: Cost savings, market share expansion, and OP (19F, Wbn) -34 route efficiency Consensus OP (19F, Wbn) -16 1) Cost savings: Eastar Jet operates the same B737 series aircraft (22 B737 aircraft and EPS Growth (19F, %) - two B737 Max aircraft) as Jeju Air. Collectively, the two carriers will have a total of 69 Market EPS Growth (19F, %) -33.3 aircraft (67 B737 aircraft and two B737 Max aircraft). Thus, we believe the acquisition will P/E (19F, x) - lead to economies of scale, better negotiating power, and cost savings from the s haring Market P/E (19F, x) 15.0 of pilot resources and maintenance infrastructure. Though it is still too early to make a KOSPI 2,194.76 precise assumption, we estimate CASK (excluding fuel costs) would fall 3-5% as a result. Market Cap (Wbn) 730 2) Market share expansion: We expect Jeju Air to further strengt hen its market Shares Outstanding (mn) 26 position, expanding its short-haul international passenger market share to nearly 15% Free Float (%) 33.0 post-acquisition, which is more than double that of the current no. 2 carrier (6-7%). Foreign Ownership (%) 6.5 Beta (12M) 1.26 3) Route efficiency: Jeju Air and Eastar Jet currently share most r outes in Asia. We believe the acquisition will allow Jeju Air to make flexible route adjustments according 52-Week Low 22,800 to market conditions—by, for example, increasing capacity on Eastar Jet’s exclusive 52-Week High 42,300 routes (Incheon-Shanghai) and routes where Eastar Jet has relativ e strength (such as (%) 1M 6M 12M Vietnam, Thailand, and Kota Kinabalu) and reducing capacity on unprofitable routes Absolute 10.8 -19.0 -16.1 through code sharing. Relative 9.1 -22.6 -21.1 Maintain Buy and raise TP to W36,000 130 Jeju Air KOSPI We raise our target price on Jeju Air from W30,000 to W36,000 and maintain our Buy 110 rating. Ou r target price for Jeju Air corresponds to an EV/EBITDA of 5.5x based on the two carriers’ combined earnings and a weighted-average P/S of 0.48x. 90 70 While Jeju Air’s stock has recently lagged on sluggish industry conditions and increased competition, we beli eve valuation will expand in the long term, given the substantial 50 12.18 4.19 8.19 12.19 market share gains and cost-saving effects expected from the acquisition. Mirae Asset Daewoo Co., Ltd. [ Transport/Energy ] FY (Dec.) 12/16 12/17 12/18 12/19F 12/20F 12/21F Revenue (Wbn) 748 996 1,259 1,400 1,536 1,729 Jay JH Ryu +822 -3774 -1738 OP (Wbn) 58 101 101 -34 61 86 [email protected] OP Margin (%) 7.8 10.1 8.0 -2.4 4.0 5.0 NP (Wbn) 53 78 71 -51 22 46 EPS (W) 2,038 2,954 2,689 -1,923 845 1,760 ROE (%) 19.5 25.8 19.9 -14.6 6.8 13.0 P/E (x) 12.3 12.0 12.5 - 32.8 15.7 P/B (x) 2.4 2.8 2.3 2.3 2.2 1.9 Dividend Yield (%) 2.0 1.7 1.9 0.0 0.5 0.9 Note: All figures are based on consolidated K-IFRS; NP refers to net profit attributable to controlling interests Source: Company data, Mirae Asset Daewoo Research estimates .
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