Citigroup Inc yesterday downgraded its investment ratings on the nation’s two largest carriers to “sell,” saying their earnings could decline over the next three quarters.
“We forecast earnings to peak in the third quarter,” Citigroup analysts Timothy Chen and Peter Kurz said in a client note. “Earnings momentum should continue to subside until the third quarter of 2011 as both passenger and cargo businesses are likely to remain moderate in the first half of 2011.”
Citigroup downgraded CAL to “sell” from “buy” and cut its target price to NT$17 from NT$21.60.
The brokerage also revised its rating on EVA Airways Corp (EVA, 長榮航空) to “sell” from “buy” and slashed its target price to NT$20 from NT$26.
The two analysts cited negative factors — including weakening growth in passenger revenue following a decline in air fares starting next month and decelerating growth in cargo revenue because of slower demand for consumer electronics in the second half of the year — as reasons for the downgrade.
“Passenger revenues may decline 15-20 percent month-on-month in September as both yield and traffic fall due to the seasonal slowdown,” they wrote of CAL.
As for EVA, “we forecast that fourth-quarter earnings will decline 16 percent quarter-on-quarter as passenger traffic/yield should begin to fall in September,” they said.
In contrast, JP Morgan remained bullish on CAL’s prospects, buoyed by long-term growth prospects of direct cross-strait flights.
“The existing capacity serves only around one-third of the existing travel market,” JPMorgan analyst Corrine Png (方華婷) said in a research note on Tuesday.
Citigroup expects air fares to start falling by more than 20 percent after the summer high season, but Png said direct flights across the Taiwan Strait would continue to help drive the two carriers’ earnings growth.
Png retained her “overweight” rating on CAL and raised her target price to NT$24 from NT$16.
Meanwhile, CAL chairman Philip Wei (魏幸雄) said in an interview with Bloomberg Newswires yesterday that he expected the carrier to post a record profit this year after three years of losses, with growth in cargo volume doubling and a surge in passenger traffic across the Taiwan Strait.
“Cargo exports from Taiwan to both the US and Europe are just amazing, increasing a lot,” Wei said, without elaborating on the figures.
On Monday, CAL reported a record net profit of NT$3.71 billion for the second quarter, up 48 percent from the first quarter and a sixfold increase from a year earlier.
EVA also posted a record net profit of NT$3.97 billion for the second quarter, which was much better than its NT$1.88 billion a year earlier and represented growth of 219 percent from the first quarter.
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