Airports of Thailand

Airports of Thailand Plc (AOT)
With its moneybox filling from all takeoffs and landings at its airports, AOT is tourism’s best proxy, especially as we get into the high season. Aside from the year of the floods, traffic has grown in double digits for the past few years. It will continue robust, backed by more flights by LCCs, aggressive fleet expansion by all Thai airlines plus AOT’s own capacity expansion in FY2014. It is also poised for more concession revenue and a PSC hike. BUY; mid-14 DCF PT is Bt235.
Strong traffic ahead. Passenger movement jumped 20% YoY in 11MFY13 (Oct 12-Aug 13), continuing double-digit growth seen since FY2010 (except the flood-caused hiccup in FY2012). We expect traffic to continue strong, backed by several factors: 1) high season for tourism in October-March; 2) more flights by low-cost carriers (LCCs), at 31% of AOT traffic in 11MFY13 (vs 6% in FY2004), as more people fly more frequently;
3) rapid fleet expansion by Thai airlines, notably planned LCC fleet expansion of 20% p.a. over the next few years; 4) its own capacity expansion in FY2014. AOT will reopen Terminal 2 at Don Muang in mid-FY2014, raising handling capacity by 50% or 9mn passengers, at CAPEX of Bt3bn. It will also build a new terminal at Phuket Airport early in FY2014, allowing 4-5mn more passengers/year (+75%) at CAPEX of Bt100mn.
Upside from new terminals. We have not yet included upside from additional concession revenue from the commercial area in the new terminals, waiting for details on space allocation for various activities and the bids by prospective concessionaires. We note that upon fully opening Terminal 1 at Don Muang on October 1, 2012, AOT gave a 10-year concession for duty-free space (1,100 sqm) to King Power and retail area (2,700 sqm) to The Mall, with a minimum guarantee of Bt956mn/year, and an annual 10% increase in the minimum guarantee.
Progress on PSC hike. AOT has officially asked to raise passenger service charges (PSC), to Bt150/person from Bt100/person (domestic) and to Bt800/person from Bt700/person (international). New ministerial regulations related to PSC were published in the Government Gazette in July 2013 and the increase is now waiting for the DCA (Department of Civil Aviation) approval. Based on recent news, it is now standing by for the Cabinet to appoint a new committee (seven persons) for the DCA, which means that the earliest a new PSC will be approved is January 1, 2014. AOT needs to give 6-12 months advance notice to airlines before the new PSC takes effect. Using this as a guide, we estimate the rise in PSC will add 14% to FY2015 earnings and 20% to FY2016. We roughly estimate the incremental value from the PSC hike at ~Bt30/share, not yet in our PT.
Maintain BUY. We maintain BUY with mid-14 DCF PT of Bt235. Apart from solid traffic growth in the near term, the potential for additional concession revenue from new terminals and a PSC hike will be positive catalysts for the share price. Key risks are changes in traffic movement and expenses/investments related to new terminals.