Thai Airways International

Investment thesis

Expectations of weak FY14 earnings 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 see execution risk, given the firm’s inflexible cost structure and numerous stakeholder groups. The stock currently trades at a YE15 PBV of 0.7x—0.4SDs below its long-term average of 0.8x and discount to the Asian mean of 1.1x.    

Expect operational improvement for 3Q14, but still 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 a better political climate. Its 3Q14 RPK was 14,243m, down 12% YoY but up 15% QoQ, while the cabin factor was 71.1%, down from 75.3% in 3Q13 but up substantially from 63.5% in 2Q14. We expect passenger yield to post a 4% QoQ decline (stable YoY) to Bt2.56/RPK. Total operating expenses are likely to have slipped 5% YoY but inched up 1% QoQ. We, therefore, expect THAI to post a 3Q14 core loss of Bt5,257m, deeper YoY but shallower QoQ.

However, the firm’s 3Q14 bottom-line is expected to turn around, both YoY and QoQ, to a net profit of Bt1,043m, driven by an assumed FX gain of Bt7.3bn (despite recognition of Bt1bn in impairments on aircraft). 

4Q14 operational improvement expected, but to remain in red ink 

As it is now tourism high season, we expect foreign visitor arrivals and THAI’s passenger numbers to improve further in 4Q14, both YoY and QoQ. However, foreign visitor arrivals have yet to normalize (possibly, visitors have been deterred by the fact that martial law remains technically in force).

There were recovery signs in October—AOT reported that total (domestic and international) passenger throughput during Oct 1-30 rose by 11% YoY and 17% MoM against a 2% YoY dip in Sept. As such, we expect THAI’s 4Q14 core operation to improve QoQ but weaken YoY. The firm will report a core loss, our model indicates. 

Slow air traffic recovery prompts forecast downgrades 

While we have factored in extra gains and losses incurred during 9M14 and upgraded our FY14 net loss forecast to Bt13bn from Bt17bn, we have downgraded our key assumptions for FY14 and our full-year core loss projection has deepened to Bt20bn from Bt17bn (Figure 2), as air traffic and passenger yield have recovered at slower rates than we had previously anticipated. We have also cut our YE15 target price to Bt15 (from Bt15.40)—pegged to a PBV 0.8x, its long-term average.