Air Arabia released its 4Q18 KPIs with pre-minority earnings of cAED26mn, largely in line with last year’s levels (+2% Y-o-Y), but missed our estimate by 22% likely on a combination of lower margins, interest income and other income. 
 
Revenue for the quarter rose 20% Y-o-Y (+15% vs. EFGe) driven by higher passenger numbers (+5% to 2.1mn passengers; seat factor at c81%) and a strong pick-up yields. Meanwhile, FY18 revenue grew 10% Y-o-Y to AED4.1bn, with the airline flying more than 8.7mn passengers (+2% Y-o-Y, seat factor at 81%). The airline’s fleet size stood at 53 aircraft (added 3 during 2018) flying to more than 155 destinations (added 26 new routes in 2018) from its main hubs in UAE, Morocco and Egypt. 
                
The BoD is proposing an cAED860mn impairment charge on the airline’s exposure in private equity firm Abraaj, which is subject to ratification by shareholders at the company’s AGM. Air Arabia will report a loss of AED307mn for 2018 if the impairment is approved. Air Arabia’s total Abraaj exposure stood at AED1.33bn (USD362mn) 
 
While the uptick in yields is impressive, it did not trickle down to earnings. We have a Neutral rating partly as we are wary of the high exposure to Abraaj (excluded from our valuation), which will affect ST earnings growth due to lower interest income. (Hatem Alaa, CFA, Nada S. Amin, Mirna Maher, company)
 
Air Arabia (DU): AED0.99 as of 13 Feb. 2019, Rating: Neutral, TP: AED1.07/share, MCap: USD1,259mn, AIRARABI UH/AIRA.DU