Airports of Thailand

Airports of Thailand Plc (AOT) 

Investment thesis

The recently announced airport expansion plan should generate positive sentiment toward AOT, as it requires smaller CAPEX and creates scope for upside to our earnings forecasts and valuation. An expected QoQ earnings contraction in 4Q14 (July-Sept) may cap the share price performance in the near-term, but we expect the stock to rebuild momentum once we enter Oct-Dec high season and tourist arrivals fully rebound. There would be scope for upside to our earnings forecast if PSCs were to rise. The stock currently trades at a forward PEG ratio of 2.3x, a discount to the regional average of 2.4x.    

Multi-terminal to come ahead of Suvarnabhumi Airport Phase 2      

Yesterday, AOT’s board resolved to dust off the multi-terminal project and shelve the Suvarnbhumi Airport Phase 2 project (Phase 2), as it is under investigation by the NCPO. The multi-terminal project was the subject of an AOT feasibility study some years ago, but was dropped in favor of Phase 2. The multi-terminal will be used for both international and domestic passengers with a capacity of 20m passengers/year. The investment cost is expected to be about Bt24bn. The project is expected to get Cabinet approval this year and go to tender in 2015. The multi-terminal could start operating in 2017.

Even though the Phase 2 project has been delayed indefinitely (it was earlier envisaged to start operating in 2017), we do not see any negative impact. The multi-terminal will add passenger capacity of 20m pax per year, against 15m pax per year for the Phase 2 project. However, there will be only an additional 10-12 contact gates at the multi terminal compared to 28 contact gates under Phase 2.       

Smaller CAPEX implies upside to earnings and valuation 

The lower CAPEX for the multi-terminal project means scope for upside to our earnings forecasts and target price. The Bt24bn CAPEX should be easily financed by internal cash flows (no debt needed), as AOT generates EBITDA of not less than Bt20bn per year. That would mean savings on interest costs and would preserve more internal cash. If the plan is approved, AOT’s long-term earnings will rise by 5%, on average, and its end Sept-2014 target price will increase to Bt265 (from Bt230).

Further scope for upside to earnings from U-Tapao Airport   

The board also resolved to work with the Ministry of Transport and the Royal Thai Navy to assemble a development plan for U-Tapao Airport as a commercial gateway with a target to service 2.5m pax per year. The investment cost would be about Bt100m. If U-Tapao were developed, AOT would be the airport operator, which would mean further scope for upside to its long-term earnings profile.