Thai Airways International

Thai Airways International Plc (THAI)

Above estimates
THAI posted a 1Q13 net profit of Bt8,283m, up by 59% YoY and 960% QoQ. Stripping out an FX gain of Bt6,230m, a gain on a reclassified investment of Bt298m and impairments on aircraft and other assets of Bt2,368m, 1Q13 core profit would be Bt4,224m, up 28% YoY and a turnaround from the loss posted for 4Q12. The bottom-line beat our estimate and the consensus, due to larger-than-expected extra gains, while the core profit was slightly better than our expectation and the street number, due to lower-than-modeled fuel and tax expenses.
Results highlights
The drivers of the core operational improvement were: 1) greater traffic numbers, 2) a higher passenger yield, 3) lower depreciation expenses, 4) lower interest expenses and 5) a tax credit. Passenger traffic increased by 8% YoY and 6% QoQ to 16,802m RPK, while the cabin factor rose to 79.8% in 1Q13 from 78.2% in 1Q12 and 76.3% in 4Q12. Moreover, the passenger yield (including fuel and insurance surcharges) rose by 1% both YoY and QoQ to Bt2.79/RPK. In addition, interest expenses declined by 5% YoY and 6% QoQ, due to lower effective interest rates. The company also booked a tax credit in 1Q13 against tax expenses in 1Q12 and 4Q12.
Outlook
Even though the second-quarter is normally low season for Thai tourism and THAI, we expect the firm’s 2Q13 core operation to improve YoY, driven by fleet expansion, capacity management and a better passenger yield. The cabin factor for April was 76% while forward bookings for May and June are currently 71% and 60%, respectively. We, therefore, expect the 2Q13 cabin factor to improve YoY from the 75.1% posted for 2Q12. 
What’s changed?
Even though 1Q13 core profit represents 70% of our FY13 net earnings forecast of Bt6,014m, we maintain our model unchanged, as THAI’s 2Q13 core operation is expected to report red ink.
Investment thesis
Strong 1Q13 earnings growth together with expectations of a YoY core operational improvement in 2Q13 will catalyze the share price in the near-term, we believe. Furthermore, the forecast FY13-15 profit CAGR of 32% (against 8% for the SET), driven by capacity expansion and yield improvement, should bring on more stock price appreciation. Valuation-wise, THAI currently trades at a YE13 PBV of 0.9x and an EV/EBITDA ratio of 5.7x, discounts to the regional means (combined full service and low-cost carriers) of 1.2x and 8.9x, respectively.