Thai Airway International

Thai Airway International Plc (THAI)

Strategy adjustment reduces net loss by 81%yoy to B1.5bn
Although earnings of THAI were upside down from a profit in 1Q12 to a net loss of B1.5bn in 2Q12, worse than our projection for a net loss of B1bn, the loss has decreased as large as 81%yoy. Nevertheless, excluding an extraordinary item of net revenue mainly from a FX gain of B1.2bn, norm loss in 2Q12 stood at B2.7bn, decreasing 50%yoy. The decrease in norm loss has resulted from a strategy adjustment by reducing the number of flights to meet with lower demands during the off season in 2Q12 and a low profit base as a result of the effect from Japanese tsunami last year which helped boost the cabin factor from 66.4% to 75.1%. However, the benefit has partially
been offset by continuous promotions after the flood in 4Q12, so passenger yield in this quarter has dropped by 5%yoy. Consequently, overall service revenue of THAI in 2Q12 has grown only 6.9%yoy to stand at B47.9bn, while operating cost has stabilized from the same period last year. Although staff expense has increased by 10.2%yoy, it has been compensated by a benefit from decreasing aircraft rental and maintenance fee.

Sure THAI’s earnings will revert to norm profit again since 3Q12

Passenger volume tends to recover in 3Q12 after passing the off-season in 2Q12 and would grow further in 4Q12 as a result of the high season for Thailand’s tourism. This has been reflected by cabin factor in 3Q12 which has risen to 79.8% in July while booking in August and September comprises a cabin factor of 75% and 52% respectively. Accordingly, we project that cabin factor would increase from 2Q12 to 77% in 3Q12, already above a break even point. Moreover, the portion of the promotions will decrease by more than 50%qoq, so passenger yield would recover in 3Q12. Accordingly, we believe revenue of THAI would improve substantially in 3Q12 before peaking in 4Q12 due to a high season. At the same time, cost of operation in 2H12 tends to decrease following a decline in average global jet fuel between June-July 2012 which THAI has made a hedging against a decrease of the fuel price at around 90% of its total transportation volume in 2H12. Accordingly, THAI’s managements are confident that in the second half of the year average fuel cost would decrease by 3-4% from 1H12. As we believe that profit in 2H12 would be substantially higher than 1H12, we maintain our forecast, projecting net profit for FY2012 at B3.8bn.

Already bottom out in 2Q12. To revert to profit in 2H12.
Buy
We believe THAI’s share price that has dropped more than 36% from the year’s high has already absorbed the negative news from the loss in 2Q12 and it would rebound following profit in the rest of the year. At the same time, comparing with PBV and ROE of global aviation stocks, under 2012’s ROE of 5.9% THAI should be traded at 0.9x PBV (fair value based on 0.85x PBV), with 28.1% upside. Reiterate to buy.