Thai Airway International Plc (THAI)

Thai Airway International Plc (THAI)

THAI bullish about improving earnings in 2H12
At the meeting regarding 2Q12’s earnings declaration yesterday, THAI reported that the loss in the previous quarter came mainly from passenger yield which had dropped substantially as a result of a promotional campaign during the off-season period as well as remaining booking from the promotion during the flood. However, since 3Q12 it projected passenger yield to recover from a portion of low cost ticket promotion that would gradually decrease before the coming of a high
season in 4Q12 with the ticket price peak. Meanwhile, at present THAI’s strategic adjustment to avoid Europe routes which have high competition but lower demand following the economic situation and change to increase flights for regional routes has made passenger volume in 3Q12 brighten. This is evidenced by cabin factor in July which was as high as 79.8%, while booking in August and September accounted for a cabin factor of 80% and 65%. Furthermore, in 2H12
THAI already hedged against the price risk for more than 90% of its oil, so If global crude oil price is not much volatile in the rest of the year, fuel cost in 2H12 would decline from 1H12 by 4-5%.

Surely revert to norm profit again since 3Q12
With a rapid recovery in passenger volume in 3Q12 after passing the off-season period in 2Q12, we believe cabin factor in 3Q12 would be as high as 77%-78%. Combined with passenger yield that is projected to rebound qoq and fuel cost that is projected to decrease qoq, we estimate the break even point in 3Q12 at a cabin factor of only 75%. Consequently, THAI would be able to rebound from a loss in 2Q12 to a norm profit of around B1.5-2.0bn in 3Q12. At the same time, benefit from the tourism high season in the 4th quarter of every year is the evidence supporting us to believe that norm profit of THAI would peak in 4Q12. In conclusion, profit in 2H12 is anticipated to outgrow 1H12 substantially, which would make THAI have a net profit in 2012 at
B3.8bn as we have projected, a reverse from a net loss of B10bn in the prior year.

Share price is at lowest level, very cheap compared with global peers. Buy
We believe THAI’s share price that has fallen by 35.4% from the year’s high has already absorbed negative news about the loss in 2Q12. The share price has a chance to recover following norm profit in the rest of the year. Moreover, comparing to PBV and ROE of aviation stocks worldwide, under ROE forecast at end-2012 at 5.9%, THAI should be traded at PBV of around 0.94x (fair value is at 0.85x PBV), implying 26.8% upside. Buy.