Thai Airways International

Thai Airways International Plc (THAI) 
3Q13 profit was 60% below our estimate
Below estimates
THAI posted a 3Q13 net loss of Bt6,195m, a reversal from the net profit posted for 3Q12, but the loss was shallower QoQ. Stripping out an FX loss of Bt2,890m and impairments on assets of Bt87m, the 3Q13 core loss would be Bt3,217m, a reversal from the core profit posted for 3Q12 but shallower QoQ. The loss was 5% deeper than our estimate and the consensus, due to higher-than-expected other expenses.
Results highlights
The weaker YoY core operational performance was due to: 1) a slimmer passenger yield (down 5% YoY to Bt2.57/RPK), 2) lower freight revenue (down 9% YoY to 603m RFTK), 3) 2% YoY freight yield squeeze to Bt9.40/tonne-km), 4) 6% heavier OPEX, 5) an SG&A/sales ratio rise to 4.8% from 3.2% in 3Q12 and 6) 17% higher interest expenses. Note that passenger traffic rose 7% YoY to 16,149m RPK, while the cabin factor declined only slightly to 75.3% from 76.7% in 3Q12. The QoQ core operational improvement was due to: 1) 10% greater traffic numbers, 2) a 3% higher freight yield and 3) a tax credit (against tax expenses booked in 2Q13). Note that the passenger yield was stable QoQ.
Outlook
The fourth-quarter is normally the start of high season for Thai tourism. THAI’s passenger traffic and passenger yield both normally rise about 3% QoQ in the period. We, therefore, expect its 4Q13 core operation to improve QoQ (and YoY), driven by air traffic growth and an improved passenger yield. However, there is downside risk to the bottom-line for the quarter from impairments on aircraft. 
What’s changed?
We have slashed our FY13 bottom-line forecast to a loss of Bt6,180m from a profit of Bt2,087m. Our new projection factors in: 1) extra losses booked in 3Q13 and 2) a 3% higher OPEX assumption. We have also cut our FY14 earnings forecast by 58% to Bt3,508m to reflect: 1) a diminished passenger yield expectation to Bt2.64/km (from Bt2.67/km) and 2) a 2% higher OPEX assumption. Consequently, our YE14 target price falls to Bt23 from Bt27, pegged to a PBV of 0.8x (THAI’s long-term average). We expect a consensus earnings forecast downgrade to follow.
Investment thesis
We think the market had anticipated and priced in weak 3Q13 earnings. Expectations of a QoQ core operational improvement in 4Q13 in tandem with high season for Thai tourism should catalyze the share price soon. Valuation-wise, THAI currently trades at a YE14 PBV of 0.6x—discounts to both its long-term average and to the regional mean of 0.9x.