Thai Airways International

Thai Airways International Plc (THAI)

Investment thesis
The weak earnings outlook will continue to make for an uninspiring share price performance. Moreover, THAI’s business restructuring plan is unlikely to bear fruit in the near-term and we think the plan entails execution risk, given the firm’s inflexible cost structure. As such, the recent share price rally is unjustified, we believe. We have downgraded our rating from HOLD to SELL. THAI currently trades at a YE14 PBV of 0.9x—0.2SD above its long-term average of 0.8x but on par with the regional mean. Within airline space, we prefer AAV for its strong operational performance and resilient profit growth profile.   
Expect huge core loss for 2Q14, due to weak traffic
Demand for air travel to Thailand dropped significantly in 2Q14, due to political chaos and the imposition of the martial Law on May 20 (followed by a coup on May 22). We expect THAI to post a 2Q14 net loss of Bt7.5bn, deeper both YoY and QoQ. Stripping out an assumed FX gain of Bt1bn and impairments on aircraft and assets of Bt1.2bn, the 2Q14 core loss would be Bt7.3bn, deeper both YoY and QoQ.
THAI’s 2Q14 RPK fell by 15% both YoY and QoQ to 12,430m, while the cabin factor dropped to 63.5% from 70.5% in 2Q13 and 70.1% in 1Q14. In addition, the 2Q14 passenger yield is expected to post a 3% QoQ decline (but a 4% YoY rise) to Bt2.68/RPK. Depreciation and leasing expenses are expected to have increased by 3% and 26% YoY, respectively, due to fleet expansion.   
3Q14 operational improvement expected, but to remain in red ink
Even though the third-quarter is still low season for Thai tourism, we expect foreign arrivals and THAI’s passenger numbers to rebound QoQ in 3Q14, driven by several incentives launched by state agencies/SOEs. There were recovery signs in July—AOT’s total passenger numbers during 1-28 July reaffirmed the recovery by declining only 4% YoY (and jumping 18% MoM) against an 11% YoY drop in June. As such, we expect THAI’s 3Q14 core operation to improve QoQ and YoY, but it will remain in red ink.
Fragile 2Q14 earnings prospects prompt forecast downgrades
We have downgraded our key assumptions for FY14 and our full-year net loss forecast has deepened to Bt16bn from Bt9bn (Figure 2), as the firm’s 2Q14 operational performance is now expected to be much weaker than we previously anticipated. We have also cut our YE14 target price to Bt12 (from Bt13.70)—pegged to PBV 0.66x, 0.5SD below its long-term average. Moreover, we are concerned about the risk of capital-raising being necessary, as THAI’s balance sheet looks increasingly weak. We estimate its end-June 2014 interest-bearing debt/equity ratio at 4.2x—a 12-year high.