Cathay Pacific's core net profit hit HKD24m

Here's why it disappointed analyst.

According to Maybank Kim Eng, Cathay’s 1H13 core net profit of HKD24m, though a reversal from 1H12’s loss of HKD935m, was significantly below its expectations, and the street's.

Here's more:

Yield pressures coupled with a shocking associate loss of HKD155m and higher staff cost by were the contributing factors. We are not optimistic against a backdrop of weak yields, a drab cargo market and mounting cost pressures.

We maintain Cathay as a SELL with an unchanged TP of HKD12.50, based on 8.0x 2013 adjusted EV/EBITDAR, in line with the regional peers.

1H13 a victim of rising cost, associate underperformance. Cathay has shrunk its capacity by 4.8% YoY in 1H13 in order to preserve its loads and contain its variable costs.

This has caused Cathay’s aircraft utilization to reduce by 3.3% YoY to 11.6 hours and subsequently bumped up unit cost excluding fuel by 2.3% YoY.

This is a clear indicator that the underlying demand is weak and Cathay’s ability to remain profitable is by turning itself into a smaller airline. This is unsustainable over the long term and not an attractive investment case.

Management running out of ammunition. The management is running out of options to overturn the business misfortunes. Cathay has already disposed off its old aircraft, offered voluntary no-pay leave to staff, and frozen new staff hire and salary increments.

Even then, the business is barely breakeven. We foresee continued challenges ahead as the industry is plagued by weak yields and stifling competition.