Airports of Thailand

Airports of Thailand Plc (AOT)

Investment thesis
The market has already priced in the impact of the coup and Thai tourism low season (which normally lasts through the July-Sept quarter), we believe. We think AOT will rebuild momentum going forward, driven by anticipation of an air traffic recovery and the bottoming out of earnings in 3Q14 (April-June). QoQ profit growth will resume in 4Q14, as should share price appreciation. There would be scope for upside to our forecast if PSCs were to increase. The stock currently trades at an FY14 PEG ratio of 2x, in line with the regional average.   
Core earnings to bottom out in 3Q14 (April-June) 
AOT’s 3Q14 air traffic numbers have been hit hard by the political chaos, the onset of tourism low season and the May 22 coup. The firm’s passenger numbers in 3Q14-to-date have dropped by 3% YoY and 13% QoQ, while aircraft movement has fallen by 1% YoY and 14% QoQ. As such, core earnings for the quarter are expected to decline YoY and QoQ. However, 3Q14 will prove to be the nadir of FY14, we believe—numbers will improve in 4Q14 on heavier air traffic in tandem with the easing of political confrontation.
Earnings forecast trimmed, due to weak air traffic numbers
In order to factor in disappointing Oct 2013-March 2014 numbers and a diminished expectation for 3Q14, we have revised down our FY14-15 air traffic projections. Our passenger growth assumptions are now 4% for FY14 (down from 12%) and 10% for FY15 (from 12%). We have also trimmed our operating expenses forecasts to fine-tune for lower revenue. Hence our earnings projections decline by 5% for FY14 and by 3% for FY15 (see Figure 2). As a consequence, we have trimmed our end-Sept 2014 target price to from Bt240 to Bt230.  
Expect air traffic to rebound in the near future
Historical data indicate that air traffic rebounds swiftly after a period of intense political confrontation has eased. On Sept 19, 2006 there was a coup; passenger traffic dropped 16% MoM, but then increased by an average of 12% MoM for the next three months (Figure 3). If the historical pattern were to play out this time around, we would expect air traffic to rebound within the next few months. Moreover, high season for Thai tourism will start in October. As such, AOT’s quarterly earnings growth is expected to regain traction in 4Q14 (July-Sept) onward.
Given the strong 77% correlation between passenger numbers and AOT’s share price, we would expect it to increase as well.