Airports of Thailand

Airports of Thailand Plc (AOT)

We left AOT’s briefing for analysts literally worry-free. It is now clear that Bangkok will adopt a dual-airport policy. There is also clarity in future capex line-up. A hike in PSC remains on the agenda. Not much else stands in the way for AOT to show its true business potential. We maintain our forecast and target price (DCF at 9.5% WACC, 2% LTG).Valuation looks undemanding and
this is even before any upside from the proposed PSC hike is built in. We reiterate our Outperform call.
AOT’s top executives hosted an analysts’ briefing with the following highlights:
The incentive package for LCCs to move from Suvarnabhumi Airport (BKK) to Don Muang (DMK) will cost AOT just THB250m during FY13-15. The main feature is discounts on landing charges at a rate of 95% in Aug-Sep 12, 30% in FY13, 20% in FY14, and 10% in FY15. Regarding capex, BKK’s Phase Two expansion (THB62.5bn, FY12-17) and third runway (THB12bn, pending an environmental study) will proceed as planned, but another domestic terminal is no longer necessary. Only THB155m will be required to make DMK ready for LCC relocation. The
remaining compensation to those households affected by noise around BKK will not exceed THB1.5bn. As for opex, a fuller utilisation of DMK will push up the company’s costs by only THB100m/year.
The commercial areas at DMK will be contracted out for duty-free and general merchandising.
The company plans to commercialise the unused land at its airports. The development model will be that of a concession type, and not its own investment. Management targets 4QFY13 for the implementation of new PSC rates.This means regulatory approval is required by this September.
What We Think Overall, management’s guidance on capex and operations was more generous than our assumptions. We have yet to build in the upside from DMK’s new commercial concessions and the planned PSC hike. It is also too early to get excited by the planned utilisation of dormant assets.
What You Should Do: Buy AOT to profit from Thailand’s great promise in air traffic growth.
Management’s guidance vs. our assumptions:
Capex
According to management, AOT’s six-year capex line-up includes the Phase Two
expansion at BKK (THB62.5bn), a third runway at BKK (THB12bn), expansion
of the Phuket Airport terminal (THB5.6bn), DMK renovation (THB155m), and
noise pollution compensation (THB1.5bn).
We have built all of these into our model plus an extra THB1bn/year as reserve
for non-budgeted spending (see Figure 1). We do not see capex financing as an
issue given the company’s large cash pile (THB34bn), solid operating cashflow
(THB11-15bn per year), and current low gearing level (0.3x).
Financial impact from DMK recommissioning
Management estimates airline discounts will cost the company THB115m in
FY13 (on 30% discount rate), THB85m in FY14 (20%) and THB45m in FY15
(10%). As DMK will be more fully commissioned, AOT will incur additional opex
of THB100m/year.
Our forecast assumes the 30% discount on landing charges at DMK will stay
permanently. LCC flights make up 30% of total number of flights at AOT’s
airports, but the share is lower in terms of the landing charges from LCCs given
their smaller average aircraft size versus that of FSCs. Based on these, we
calculate a revenue loss of THB370m/year for AOT (1.2% of yearly revenue).
In terms of opex, we assume additional spending of THB400m/year after the
recommissioning of DMK. We may revisit these conservative assumptions after
a smooth relocation of airlines from BKK to DMK.
Long-term traffic projection
Management projects 60m pax/year at BKK by FY17 and 120m pax/year by
FY32. This projection is close to ours, which currently looks for the 60m and
120m pax/year milestones for BKK to be reached in FY18 and FY33,
respectively.
Last year, the pax number at BKK was 47.8m. This year, we expect a growth rate
of 6% (3% for international due to floods, 11% for domestic) to 50.7m. Assuming
the migration of 8m pax to DMK and a 9% pax growth in FY13, we estimate
BKK pax traffic next year would debase to 46.5m. Thereafter, we assume a
long-term traffic growth rate of 5% p.a.
We believe our long-term volume growth assumption of 5% p.a. contains a
conservative bias. Over the past 10 years, the pax traffic at AOT’s airports grew
5.6% p.a. While there is a larger base going forward, we believe the base effect
could be offset, if not overcome, by the two structural drivers. These are the
growing middle class in Asia, and the booming LCC industry. The emergence of
the Asean Economic Community (AEC) could also offer another push for faster
air travel growth in the region.
Upside from the proposed PSC hike
Management targets an implementation of the higher pax service charge (PSC)
rates within 4QFY13. This timeline means the Civil Aviation Board’s approval is
required by this September given that up to 12 months of advance notice to
airlines could be required before the new rates are put into use.
Our forecast and valuation do not include AOT’s proposed PSC hike. Figure 6
shows our estimate of how the hike would impact AOT’s financials and
valuation, assuming that the new prices (estimated to be THB800 for
international PSC and THB150 for domestic PSC) are applied from FY14
onwards.
In our view, when it comes to a PSC hike, its timing is not so crucial as long as
AOT is given the green light for the hike. Any 12-month delay will shave only
THB1.4/share off our fair value estimate with the PSC hike (THB95/share), as
quantified in Figure 6.