WE D 07 D EC 2016

CEBU AIR, INC:

Reducing FV estimate to Php119.0/sh on weaker
peso, downgrading to HOLD
CEB’s year to date earnings has been faring well seeing that its 9M16 core net income increased by SHARE DATA
12.9% y/y to Php7.8Bil. The growth in passenger volume coupled with higher fares boosted revenues
while low fuel prices at the beginning of the year contracted the growth of operating expenses. Rating HOLD
However, CEB’s two major expense drivers, forex rate and fuel prices, have both been rising towards Ticker CEB
the end of the year. The Philippine peso has been continuously depreciating relative to the US dollar Fair Value (Php) 119.00
since October, experiencing its lowest levels since 2006. Likewise, fuel prices have rallied during the
Current Price 97.80
year and is expected to continue rising with the OPEC’s decision to cut oil supply.
Upside (%) 21.68
Adjusting forex rate forecast upward due to weaker peso. The Php/US$ exchange rate broke
above 48 last October and is now bordering the 50 mark, its weakest in over 10 years. As of November
end, the exchange rate closed at Php49.73/US$1. This has a significant impact on CEB’s operating SHARE PRICE MOVEMENT
income as most of its opex, which includes fuel expense, repairs and maintenance, and aircraft and
traffic servicing, among others are US dollar denominated. Because of the weakening of the peso, 110
we are raising our forex assumptions to Php48/US$1 for 2016 and Php50/US$1 for 2017 and 2018.

Adjusting fuel expense forecast for the year. Jet fuel prices have been relatively stable from 100
May up to November this year at US$55-60/barrel after recovering from low levels in January. The
average jet fuel price as of November 30 was at US$52.1/barrel, 19.6% lower than the FY15 average
of US$64.80/barrel. However, the OPEC recently announced that they will be reducing oil output by 90
about 1.2Mil barrels per day starting January next year. We believe that our fuel assumptions for
years 2017 and 2018 are already adequate for the expected increase in fuel prices. Hence, we are
lowering our jet fuel price assumptions by 8.3% to US$55/barrel for the current year, and maintaining 80
2017 and 2018 assumptions at US$65/barrel and US$70/barrel respectively. 7-Sep-16 7-Oct-16 7-Nov-16 7-Dec-16
CEB PSEi

Reducing FV estimate to Php119.0/sh, downgrading to HOLD. Following the changes, our core
net income forecast decreased by 4.2% to Php10.6Bil in 2016, by 16.6% to Php8.1Bil in 2017 and by
9.2% to Php9.2Bil in 2018. We are reducing our FV estimate on CEB by 26.5% to Php119.0/sh from
Php162.0/sh. Based on yesterday’s closing price of 97.95, upside potential is at 21.5%. Although ABSOLUTE PERFORMANCE
valuations remain attractive, we determined that the FV is highly sensitive on the two expense drivers
mentioned. Hence, we are downgrading our recommendation on CEB from BUY to HOLD. 1M 3M YTD
CEB -5.42 -17.61 20.02
FORECAST SUMMARY:
PSEi -5.23 -10.47 -1.88
Year to December 31 2013 2014 2015 2016E 2017E
Revenues 41,004 52,000 56,502 61,013 64,991
% change y/y 8.18 26.82 8.66 7.98 6.52
EBITDA 5,859 8,439 14,812 18,194 15,717
% change y/y 7.88 44.03 75.52 22.83 (13.61) MARKET DATA
EBITDA Margin (%) 14.29 16.23 26.21 29.82 24.18
Core Income 2,165 3,199 9,488 10,595 8,127 Market Cap 59,262.24Mil
% change y/y 5.42 47.74 196.61 11.67 (23.30) Outstanding Shares 605.95Mil
Core Income Margin (%) 5.28 6.15 16.79 17.37 12.50
Net Income 512 853 4,387 10,595 8,127 52 Wk Range 73.23 - 125.50
% change y/y (85.67) 66.72 414.03 141.50 (23.30) 3Mo Ave Daily T/O 63.32Mil
Net Income Margin (%) 0.01 0.02 0.08 0.17 0.13
EPS (cents) 0.84 1.41 7.24 17.49 13.41
% change y/y (85.74) 67.86 413.48 141.51 (23.30)

Relative Value
P/E(X) 116.61 69.47 13.53 5.60 7.30 Frances Rolfa Nicolas
P/BV(X) 2.82 2.76 2.38 1.70 1.40
Research Analyst
ROE (%)* 10.04 15.01 40.82 30.32 21.00
Dividend Yield (%) 2.04 1.02 1.53 1.02 1.02 rolfa.nicolas@colfinancial.com
*based o n co re inco me
so urce: CEB , COL estimates

Disclaimer: All content provided in COL Reports are meant to be read in the COL Financial website. Accuracy and completeness of content cannot be guaranteed if reports are viewed outside of
the COL Financial website as these may be subject to tampering or unauthorized alterations.
 C o m p an y U p d at e I C ebu A i r Inc.

WED 07 DEC 2016

CEB’s year to date earnings has been faring well seeing that its 9M16 core net income increased
by 12.9% y/y to Php7.8Bil. The growth in passenger volume coupled with higher fares boosted
revenues while low fuel prices at the beginning of the year contracted the growth of operating
expenses. However, CEB’s two major expense drivers, forex rate and fuel prices, have both been
rising towards the end of the year. The Philippine peso has been continuously depreciating relative
to the US dollar since October, experiencing its lowest levels since 2006. Likewise, fuel prices
have rallied during the year and is expected to continue rising with the OPEC’s decision to cut oil
supply. We believe that these two factors will substantially affect CEB’s earnings in the following
years. Hence, we are reducing our FV estimate to Php119.0/sh and downgrading our recommen-
dation from BUY to HOLD.

Adjusting forex rate forecast upward due to weaker peso

The Php/US$ exchange rate broke above 48 last October and is now bordering the 50 mark, its
weakest in over 10 years. As of November end, the exchange rate closed at Php49.73/US$1.
This has a significant impact on CEB’s operating income as most of its opex, which includes fuel
expense, repairs and maintenance, and aircraft and traffic servicing, among others are US dollar
denominated. Moreover, most of the company’s long-term debts incurred in connection with air-
craft acquisitions are also US dollar denominated. Note that CEB has no outstanding forex hedges.

According to CEB, they have started to avail of Philippine peso denominated loans for some of
their aircraft acquisitions. This is expected to soften the company’s exposure to forex losses in
the long term. Nevertheless, we are raising our forex assumptions to Php48/US$1 for 2016 and
Php50/US$1 for 2017 and 2018.

Adjusting fuel expense forecast for the year

Jet fuel prices have been relatively stable from May up to November this year at US$55-60/barrel
after recovering from low levels in January. The average jet fuel price as of November 30 was at
US$52.1/barrel, 19.6% lower than the FY15 average of US$64.80/barrel. However, the OPEC
recently announced that they will be reducing oil output by about 1.2Mil barrels per day starting
January next year. This will lower the world oil supply and therefore increase fuel prices. We be-
lieve that our fuel assumptions for years 2017 and 2018 are already adequate for the expected
increase in fuel prices. On the other hand, we will be reducing our forecast for this year as there is
only one more month until year-end.

We are lowering our jet fuel price assumptions by 8.3% to US$55/barrel for 2016, and maintaining
2017 and 2018 assumptions at US$65/barrel and US$70/barrel respectively.

Exhibit 1: Changes in fuel expense estimates

2016E 2017E 2018E
Old New % change Old New % change Old New % change
Fuel expense (in PhpMil) 15,588 15,159 (2.8) 17,743 19,005 7.1 21,950 23,313 6.2
Jet fuel price per barrel
60.0 55.0 (8.3) 65.0 65.0 0.0 70.0 70.0 0.0
(in US$)
Total fleet 56 57 1.8 59 59 0.0 69 69 0.0
So urce: COL estimates

Disclaimer: All content provided in COL Reports are meant to be read in the COL Financial website. Accuracy and completeness of content cannot be guaranteed if reports are viewed outside 2
of the COL Financial website as these may be subject to tampering or unauthorized alterations.
 C o m p an y U p d ate I C ebu A i r Inc.

W ED 07 DEC 2016

Reducing FV estimate to Php119.0/sh, downgrading to HOLD

Following the changes, our core net income forecast decreased by 4.2% to Php10.6Bil in 2016, by
16.6% to Php8.1Bil in 2017 and by 9.2% to Php9.2Bil in 2018.

We are reducing our FV estimate on CEB by 26.5% to Php119.0/sh from Php162.0/sh. Based
on yesterday’s closing price of 97.95, upside potential is at 21.5%. Although valuations remain
attractive, we determined that the FV is highly sensitive on the two expense drivers mentioned.
Any further weakening of the peso and/or material increase in fuel prices can potentially erase the
upside in our estimates.

Hence, we are downgrading our recommendation on CEB from BUY to HOLD.

Exhibit 2: Changes in forecast summary

2016E 2017E 2018E
in PhpMil Old New % change Old New % change Old New % change
Revenues 61,357 61,013 (0.6) 63,551 64,991 2.3 71,810 74,570 3.8
Operating income 12,607 12,203 (3.2) 11,264 9,558 (15.1) 11,904 10,858 (8.8)
Core net income 11,055 10,595 (4.2) 9,741 8,127 (16.6) 10,177 9,238 (9.2)
So urce: COL estimates

Risk analysis on jet fuel price and forex

Factoring the two major drivers of opex, we estimated that FV estimate will decline by approxi-
mately Php20 for every peso increase in the forex rate and Php38 for every US$5 increase in av-
erage jet fuel price per barrel. Conversely, a stronger peso and/or lower fuel price will improve FV
estimate. A sensitivity analysis for different levels of average fuel price and forex rate is indicated
below.

Exhibit 3: Sensitivity analysis

Jet fuel price Forex Php/US$
US$/barrel 49.0 50.0 51.0 52.0
60.0 177.1 157.4 137.8 118.1
65.0 139.8 119.0 99.0 78.6
70.0 102.6 81.4 60.3 39.1
75.0 65.4 43.4 21.5
Source: COL est imat es

Disclaimer: All content provided in COL Reports are meant to be read in the COL Financial website. Accuracy and completeness of content cannot be guaranteed if reports are viewed outside 3
of the COL Financial website as these may be subject to tampering or unauthorized alterations.
 C o m p an y U p d at e I C ebu A i r Inc.

WED 07 DEC 2016

Important Rating Definitions

BUY
Stocks that have a BUY rating have attractive fundamentals and valuations based on our analysis. We expect the share price to outperform the market in the
next six to 12 months.

HOLD
Stocks that have a HOLD rating have either 1) attractive fundamentals but expensive valuations 2) attractive valuations but near-term earnings outlook might
be poor or vulnerable to numerous risks. Given the said factors, the share price of the stock may perform merely in line or underperform in the market in the
next six to twelve months.

SELL
We dislike both the valuations and fundamentals of stocks with a SELL rating. We expect the share price to underperform in the next six to12 months.

Important Disclaimer

Securities recommended, offered or sold by COL Financial Group, Inc. are subject to investment risks, including the possible loss of the principal amount
invested. Although information has been obtained from and is based upon sources we believe to be reliable, we do not guarantee its accuracy and said
information may be incomplete or condensed. All opinions and estimates constitute the judgment of COL’s Equity Research Department as of the date of the
report and are subject to change without prior notice. This report is for informational purposes only and is not intended as an offer or solicitation for the purchase
or sale of a security. COL Financial and/or its employees not involved in the preparation of this report may have investments in securities of derivatives of the
companies mentioned in this report and may trade them in ways different from those discussed in this report.

COL Research Team

April Lynn Tan, CFA

VP & Head of Research
april.tan@colfinancial.com

Charles William Ang, CFA George Ching Richard Lañeda, CFA

Deputy Head of Research Senior Research Manager Senior Research Manager
charles.ang@colfinancial.com george.ching@colfinancial.com richard.laneda@colfinancial.com

Frances Rolfa Nicolas Andy Dela Cruz Justin Richmond Cheng

Research Analyst Research Analyst Research Analyst
rolfa.nicolas@colfinancial.com andy.delacruz@colfinancial.com justin.cheng@colfinancial.com

Kyle Velasco
Research Analyst
kyle.velasco@colfinancial.com

Contact

COL Financial Group, Inc.

2402-D East Tower, Philippine Stock Exchange Centre,
Exchange Road, Ortigas Center, Pasig City
1605 Philippines
Tel No. +632 636-5411
Fax No. +632 635-4632
Website: www.colfinancial.com

Disclaimer: All content provided in COL Reports are meant to be read in the COL Financial website. Accuracy and completeness of content cannot be guaranteed if reports are viewed outside 4
of the COL Financial website as these may be subject to tampering or unauthorized alterations.