Residual Income Valuation

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HAWAIIAN HOLDINGS
(HA)
TEAM MEMBERS
SHAO-LUN LU
PURVI MITTAL
HAROUT SAHAKIAN
RAKESH VENKATAYOGI
Presented March 18, 2014
AGENDA
•
Business Overview
•
Macro-Economic & Industry Overview
•
Technical Analysis
•
Financial Ratios
•
Valuation
•
Recommendation
COMPANY BUSINESS OVERVIEW
•
Incorporated in January 1929
•
5249 employees
•
Market Cap : 712.95 M
•
208 operating flights as of December 31,2013

Business :
• Engaged in the scheduled air transportation of passengers and cargo
• Operating geographic locations -
2013 Geographical revenue
International
operations
30%
a) Neighbor Island : amongst the Hawaiian Islands
North
America
45%
Neighbor
Island
25%
b) North America : between the Hawaiian Islands and certain cities in
the United States
c) International : between the Hawaiian Islands and the South Pacific,
Australia, New Zealand and Asia

Current Fleet:
18 Boeing 717-200 aircraft
12 Boeing 767-300 aircraft
14 Airbus A330-200 aircraft
Source: HA 10-K Report
North America
Neighbor Island
International operations
HA ROUTES & BUSINESS PARTNERS
Source: Hawaiianairlines.com
RECENT FACTS OF 2013
 Added
planes:
$2,500,000
Revenue Trend
$2,000,000
$1,962,353
•
Added five new A330-200
$1,500,000
•
Added one ATR 42
$1,000,000
•
Retired four Boeing 767-300
$2,155,865
$1,650,459
$1,310,093
$500,000
$2010
 Added
routes:
•
Honolulu to Auckland, New Zealand in March 2013
•
Honolulu to Sendai, Japan launched in June 2103
2011
2012
2013
Operating Revenue
$700,000
$600,000
$500,000
$400,000
$300,000
$200,000
$100,000
$0
1Q13
Source: HA 10-K Report
2Q13
3Q13
4Q13
FORWARD OUTLOOK IN 2014
NEW PLANES DELIVERY
Delivery
Year
A330-200
A350XWBA321neo
800
ROUTE EXPANSION IN 2014
Total
Maui <-> Los Angeles in July 2014
2014
5
5
Los Angeles <-> Kona Summer of 2014
2015
3
3
Los Angeles <-> Lihu'e Summer of 2014
2016
2017
3
2
5
2018
6
2
8
2019
6
1
7
2020
1
1
2
16
6
30
8
Source: Company Website HAL Reports 2013 Fourth Quarter and Full year Financial Results
Oakland <-> Kona Summer of 2014
Oakland <->Lihu'e Summer of 2014
Honolulu -> Beijing, China in April 2014
MACRO-ECONOMIC
&
INDUSTRY OVERVIEW
EXTERNAL FACTORS

Per Capita Spending: Greater number of people
returning to work and improved housing will mean
consumers are willing to spend on purchases delayed due
to recession
 World Price of Oil: Price of oil is forecast to continue to
decline in 2014 due to stagnant global demand ; also
difference in oil prices around $2.
Forecast Value for 2018: $37,249
Forecasted Value for 2018: $114.92 per barrel
2013-2018 Compound Growth: 2.2%
2013-2018 Compound Growth: 2.5%
 Consumer Spending: With job growth expected to improve steadily over the five years to 2019, coupled with
normalizing credit conditions, long term historical growth rate will reassert itself
Forecasted Value for 2019: $12.64 trillion
2014-2019 Compound Growth: 2.79%
Source: IBIS World Airlines Industry Report
INDUSTRY FORECAST
 US personal consumption expenditures for US airlines are forecasted to grow
at annual compound rate of 4% between 2014 to 2018.
Source: Mergent Insight research
INDUSTRY OPPORTUNITIES
Emerging Market Growth
•Emerging markets experiencing higher growth than established economies
Ancillary Fees
•$40 billion annually from baggage fees, seat assignments, travel services
Fuel-Efficient Aircraft
•New upcoming Boeings are 13% more efficient
Internet Ticket Sales
•Major revenues from online sales which is easier and comparable
Frequent Flier sales to businesses
•Partnering with credit card companies and hotels expands their business horizons
Efficiencies with electronic documents
•Paperless ticketing and bar coding substantially reduces costs
Source: Mergent Insight Research report on Airlines
HAWAII 2014 ARRIVALS AT A GLANCE
Visitor arrivals by Air
All Other
14%
U.S. West
35%
Canada
10%
U.S. East
22%
Japan
19%
U.S. West
US West
US East
Japan
Canada
Europe
Ocenia
China
Korea
Others
Source: Hawaii Tourism Authority 2014 forecast outlook
U.S. East
Japan
Canada
All Other
Visitors arrivals forecast to Hawaii by air
2014
2015
2016
Annual growth
Annual growth
Annual growth
1.4%
1.3%
1.4%
1.0%
1.3%
1.2%
2.4%
1.8%
1.8%
1.5%
1.4%
1.3%
2.0%
2.0%
2.0%
3.9%
1.5%
1.3%
20.9%
20.0%
15.0%
8.9%
10.0%
7.0%
0.0%
1.0%
1.0%
PORTER’S FIVE FORCES FOR HA
Rivalry
Competition
•Competitive factors: price, frequency, on-time reliability, market affiliations
•Honolulu is not the origin but a destination of passenger traffic
HIGH
Supplier’s
bargaining
power
•Too much dependency on third party contractors for facilities, code sharing, reservations, ground
facilities
•Deal for frequent flyer program with Barclays Bank
MED-HIGH
Buyer’s
bargaining
power
•Large market players entering market providing competitive prices from various other locations
•Cheaper inter-island getaways lead to medium risk for HA
MEDIUM
Substitutes
•Aquatic travel between islands becoming more apparent
•Government looking to provide and cater to the peoples demand for cheaper getaways
MED-LOW
Threat of new
entrants
LOW
•Deterrents: Decrease in inter-island demand, capital intensive nature; limit to airports
•Very difficult to obtain new slots by new company; tough competition amongst existing airlines
STRENGTHS
•
•
•
•
WEAKNESSES
Largest airline based in state of Hawaii
Provides services to 20 destinations in the Pacific and
US west coast.
Consistently ranked “on-time” carrier
Unbroken decades of records of safety
•
•
•
Hawaii too south a point for connection between Asia
and US from west
Relationships with third-party contractors
Ordering of new fleets and already expanded use of
leverage around the same time
SWOT
Analysis
OPPORTUNITIES
•
•
•
Expansion into the Japanese and South Asian
markets
Only provider of Non-stop services between
Seoul, South Korea
Efficiency Opportunities: Closing of Taipei route
THREATS
•
•
•
Volatility of crude oil prices
Increasing expansion of other carriers giving
customers options
Increase in operating expenses and decrease in
net income
FINANCIALS
TECHNICAL ANALYSIS
Source: finance.yahoo.com
ROE – DUPONT METHOD
FY 2013
FY 2012
FY 2011
FY 2010
FY 2009
Tax Burden
60.00%
62.05%
244.82%
134.47%
120.08%
Interest Burden
64.60%
66.29%
-1.19%
89.82%
90.42%
Profit Margin
6.20%
6.59%
5.47%
6.97%
9.08%
Asset Turnover
1.07
1.17
1.26
1.22
1.21
Leverage
6.05
6.82
5.20
4.72
8.53
ROE
15.56%
21.63%
-1.05%
48.48%
101.75%
Source: Bloomberg
INDUSTRY COMPARABLES
Operating Profit
per ASM Ex-fuel*
Revenue per
ASM*
Cost per ASM*
Debt/Assets
Hawaiian Airlines (HA)
3.61
11.47
12.08
37.26%
Allegiant Travel (ALGT)
6.62
12.30
10.31
25.18%
Southwest Airlines (LUV)
4.54
12.69
12.71
14.57%
JetBlue Airlines (JBLU)
4.22
11.46
11.70
35.21%
Alaska Airlines (ALK)
4.19
12.65
11.83
15.21%
Delta (DAL)
3.34
14.04
14.11
22.98%
United (UAL)
3.27
13.38
14.48
33.71%
Regional
Major Airlines
Source: *Bloomberg - Industry Analysis (average of Q32012 – Q32013), Capital IQ
COMPARABLE COMPANIES
Southwest Airlines = 15%
Allegiant Travel = 15%
JetBlue Airlines = 15%
Alaska Airlines = 15%
Delta = 10%
United = 10%
American Airlines = 10%
Other: Air China, Japan Air, QANTAS, Korean Air = 10%
COMPARABLE VALUATION
P/E – 15%
Forward P/E – 20%
Estimated
Share Price
EV/Revenue – 15%
EV/EBITDA – 15%
Forward EV/EBITDA – 20%
P/B – 15%
$25.30
FORECAST ASSUMPTIONS
Revenues ($mm)
% of growth
Available Seat Miles (ASM) (millions)
Number of aircrafts in operation
Available Seat Miles / Number of aircrafts
% of growth
Revenue/ASM ($)
Source: HA 10K 2013
2013A
2014E
2015E
2016E
2017E
2018E
2,156
2,542
2,801
3,039
3,336
3,787
10%
18%
10%
9%
10%
14%
16,762
19,080
21,232
23,155
25,244
28,740
47
50
52
53
54
58
357
382
408
437
467
496
9%
7%
7%
7%
7%
6%
0.13
0.13
0.13
0.13
0.13
0.13
COST TO CAPITAL
Share Price (as of 3/15/14)
Shares outstanding (millions)
$13.60
52
Risk Free Rate
3%
Market Risk Premium
5%
Beta
Market Capitalization
1.12
713
Return on Equity (90%)
Market value of debt
806
Realized return (10%)
32.19%
10.94%
Weight of Equity
47%
Weighted Cost of Equity
Weight of Debt
53%
Cost of Debt
2.90%
Effective tax rate
35.0%
WACC
6.13%
Other Business risk premium
Adjusted WACC
Source: Yahoo Finance and Bloomberg
8.58%
2%
8.13%
RESIDUAL INCOME VALUATION
As on December 31, 2013
($mm, unless noted)
Net Income
Book Value of Common Equity
2013A
2016E
2017E
2018E
63
87
114
143
162
396
465
590
678
746
872
396
465
590
678
746
43
51
65
74
82
19
36
50
69
81
17
30
37
45
48
(Beginning BV of Equity) X (Cost of
Equity)
Present Value of Residual Income
2015E
52
Beginning BV of Common Equity
Residual Income
2014E
Equity
Charge
RESIDUAL INCOME VALUATION
Cost of Equity
11%
Terminal Growth Rate
3%
Present Value of Equity Calculations
Current Value of Common Equity ($mm)
396
Sum of PV of Residual Income ($mm)
177
Residual Income Terminal Value ($mm)
902
PV of Res. Inc. Terminal Value ($mm)
537
Present Value of Equity ($mm)
1,110
Shares Outstanding (millions)
52
Implied Share Price ($)
21.18
Cost of Equity
Terminal Growth Rate
1.5%
2.0%
2.5%
3.0%
3.5%
4.0%
4.5%
9.4%
23.53
24.51
25.63
26.92
28.43
30.22
32.37
9.9%
21.91
22.72
23.64
24.69
25.91
27.33
29.01
10.4%
20.49
21.17
21.93
22.80
23.79
24.93
26.27
10.9%
19.26
19.83
20.47
21.18
21.99
22.92
24.00
11.4%
18.18
18.66
19.19
19.79
20.46
21.22
22.09
11.9%
17.23
17.63
18.08
18.58
19.14
19.76
20.47
12.4%
16.38
16.73
17.11
17.52
17.99
18.51
19.09
IMPLIED SHARE PRICE AND DRIVERS
Key Drivers
Weights
Implied Share
Price
Comps Valuation
50%
25.30
Residual Income
Valuation
50%
21.18
Implied Share Price
23.24
 Unique Business Model
• Operates in a market with
good growth potential
• Tourism to Hawaii is expected
to increase
 Capable Management
• Regular monitoring of the
unprofitable routes
• Borrowing debt at low interest
rates
RECOMMENDATION:
BUY 100 SHARES AT
THE MARKET
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