Thai Airways International

Road to recovery

Thai Airways International Plc (THAI)

Investment thesis

The key messages at the analyst meeting yesterday reaffirmed our view toward THAI. Expectations of QoQ earnings growth in 4Q12 (high season) will soon catalyze the share price, we think. Furthermore, the forecast FY12-14 earnings CAGR of 27%, driven by capacity expansion and yield improvement, should bring on more stock price appreciation. THAI currently trades at an FY13 PEG of only 0.3x and an EV/EBITDA ratio of 4.9x, discounts to both its long-term averages and to regional means.

Expect QoQ core earnings growth in 4Q12

THAI's 4Q12 core profit is expected to rise QoQ and turn around from the core loss posted for 4Q11, led by high season for tourism and capacity expansion. Historical data show that the firm's fourth-quarter traffic volume normally expands by about 3% QoQ. THAI took delivery of two new A380 aircraft in September and early December.

Note also that passenger yield is expected to improve QoQ, driven by a higher fuel surcharge (effective October 1, 2012), the opening of a new destination (Bangkok-Sapporo in October) and fleet management. Based on management guidance, we calculate that passenger yield will rise to Bt2.76/km from Bt2.71/km in 3Q12 (but to decline from Bt2.81/km in 4Q11 due to greater competition within the airline industry).

Earnings growth momentum to be sustained through FY13

We expect THAI's core earnings growth to continue through next year, driven by further fleet expansion and yield improvement. Management targets passenger revenue growth of 12percent for FY13, fueled by a 9% increase in ASK and a 3% rise in passenger yield. Also, operating expenses (non-fuel cost excluding personnel expense) are expected to increase by only 3-4%, dampened by the revenue enhancement program (such as an upgraded IT system).

THAI has hedged some of its FY13 fuel use needs (57% of total consumption for 1Q13, 45% of total consumption for 2Q-4Q13) at a jet oil price range of US$105-116/bbl, somewhat below the current jet oil price of $127/bbl. However, the company is likely to book an extra tax expense in the range of Bt600-900m because of an accounting policy change that extends the useful life of aircraft from 15 years to 20 years (which will result in a depreciation saving of around Bt3bn).

Further low-cost diversification unlikely in near-term

Management said THAI will focus on improving the performances of the three brands in which it currently holds equity—Thai Airways, Thai Smile and Nok Air—during the next few years. The firm does not have any plans to launch another low-cost airline brand in the near future.

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Article source: http://www.thethailandlinks.com/2012/12/13/thai-airways-international/