Airports of Thailand

Airports of Thailand Plc (AOT)  

Investment thesis

The expected QoQ earnings contraction in 3Q14 (April-June) may cap the share price performance in the near-term. But we expect the stock to rebuild momentum once we enter fourth-quarter high season and tourist arrivals fully rebound. Over the long-term, AOT’s strong core profit expansion profile (an FY14-16 CAGR of 12% against 11% for the SET) will make for further share price appreciation, we believe. There would be scope for upside to our earnings forecast if PSCs were to increase. The stock currently trades at a forward PEG ratio of 2.3x, a discount to the regional average of 2.4x.    

Weak traffic to dampen 3Q14 earnings

Demand for air travel to Thailand dropped significantly in the April-June quarter, due to political chaos followed by the imposition of martial law then a coup in late May 2014. As such, we expect AOT to report a 3Q14 (April-June) net profit of Bt2,556m, down by 19% YoY and 31% QoQ. Stripping out an assumed FX loss of Bt32m, core profit would be Bt2,588m, down by 6% YoY and 29% QoQ. 

The key factors behind the expected core earnings contraction were: 1) weaker air traffic—passenger numbers declined by 3% YoY and 13% QoQ to 20.1m people and aircraft movement dropped 8% QoQ (but increased 6% YoY) to 147,878 flights—, 2) lower passenger service charges (international passengers, charged Bt700/pax, dropped by 13% YoY and 16% QoQ) and 3) lower concession revenue. Note that strong air traffic growth at Don Mueang and at provincial airports mitigated the effect of the plunge in numbers at Suvarnabhumi Airport.    

Air traffic improvement expected for 4Q14 (July-Sept), but …  

Even though the July-Sept quarter is still low season for Thai tourism, we expect foreign arrivals and AOT’s passenger numbers and aircraft movements to rebound QoQ, driven by incentives launched by state agencies/SOEs. There are recovery signs—AOT’s total passenger numbers in July reported a decline of only 3% YoY (and jumped 19% MoM) against an 11% YoY drop in June. In addition, total passenger numbers during 1-4 August rose by 2% YoY—the first YoY growth in three months. 

4Q14 earnings to decline QoQ 

Even though AOT’s air traffic numbers are expected to increase QoQ during the July-Sept quarter, we expect its core profit to decline QoQ in 4Q14, as personnel expenses normally rise in the July-Sept period on the payment of staff bonuses. We also anticipate that 4Q14 core earnings will soften YoY, as international passenger numbers have yet to normalize.