Thai Airways International

Investment thesis

The key messages at the analyst meeting yesterday reaffirmed our cautious view toward THAI. Expectations of weak FY14 earnings and slow operational improvements 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—0.4SD below its long-term average of 0.8x and a discount to the Asian mean of 1.3x. As such, downside risk to the share price appears limited. 

QoQ operational improvement expected for 4Q14, but still red ink 

As it is now tourism high season, we expect foreign visitor arrivals and THAI’s passenger numbers to increase QoQ in 4Q14. Its passenger numbers for Oct rose 14% MoM to 1.5m, while the cabin factor inched up to 68.3% from 67.6% in Sept (but was below the 71.5% posted for Oct 2013). But on a YoY basis, passenger numbers were still down 15% YoY. The enforcement of martial law and the global economic slowdown were blamed for the YoY contraction. Meanwhile, bookings are 69% for Nov and 64% for Dec. THAI’s air traffic statistics for Oct were weaker than the broad industry—AOT reported passenger growth of 11% YoY in Oct and 10% growth YoY during Nov 1-25.    

THAI has increased capacity by 12% for its winter schedule (Oct 2014-March 2015) compared to the summer schedule (April-Sept 2014). As such, we expect the 4Q14 cabin factor to decline to 69% from 71% in 4Q13 and 71.1% in 3Q14. In addition, the passenger yield is expected to weaken YoY, due to intense competition. As such, we expect THAI’s 4Q14 core operation to improve QoQ but weaken YoY and remain in red ink.

Recovery plan in progress, but will take time to bear fruit   

Management said the firm is now working on a business recovery plan and a blueprint is expected to be submitted to the SOE Super Board in Dec 2014. The plan covers four areas: 1) operations, 2) corporate management, 3) personnel and 4) financing. For FY15, THAI targets generating EBITDA of Bt29bn. The key tactics are: 1) raising extra revenue by re-routing flights, managing sales distribution channels, etc, and 2) cutting operating expenses by dropping loss-making routes and reducing fuel consumption, manpower and other expenses.

While we are optimistic about THAI’s business recovery plan, we are concerned about execution risk and we think its FY15 EBITDA target is challenging—it’s very difficult to make sweeping changes to big organizations if they go against entrenched interests. Management expects the plan to start bearing fruit in 2H15.