Airports of Thailand

Tourism is a vital part of Thailand’s economy and to keep the economy growing, we believe expansion at AOT will continue in order to capture the steady and long-term growth in tourism. In view of this, we assume AOT will continue to expand capacity beyond current plans in order to serve more passengers and thus raise its end-2015 DCF TP to Bt330/share. Though the share price has been steadily making new highs, we expect it to continue move up, supported by Thai tourism recovery and the uncovering of value from continued expansion.

Heading into an uptrend. On a monthly basis, Thai tourism is recovering: arrivals showed YoY growth in October (11.2%) for the first time since February 2014, aided by political stability and a series of stimulus measures. AOT, as Thailand’s lead airport operator, is first in the door and reports continued good momentum of arrivals into November, growing ~10% YoY. Arrivals at AOT’s airports should sail with the tide of Thailand’s tourism recovery to reach 30.2mn international tourist arrivals in 2015, up 21% YoY, after 2014’s exceptional low of 25mn.

Airport expansion needed to cement tourism’s future. Up to now, our valuation assumed AOT’s passenger capacity would rise to 121mn in FY2018 from 83.5mn currently, based on the short-term expansion plans for its three major airports, Don Mueang, Phuket and Suvarnabhumi. This would mean AOT would reach maximum capacity in FY2022; we thus assumed zero passenger growth from that year. However, tourism is a vital part of Thailand’s economy and to keep the economy growing, we believe expansion at AOT will continue in order to keep the tourism door wide open. We now assume capex of Bt120bn over FY2016-26 to build total passenger capacity to 200mn (+65%). This would allow AOT to serve 4% more passengers annually after FY2022 before again reaching maximum capacity in FY2033 (Figure 1). AOT’s financial health is not a concern as it has low net debt to equity at 0.4x (as of June 2014), strong operating cash flow and our assumed future investment will be paid over 10 years.

Forecasts raised, TP upped to Bt330/share. We revised up AOT’s core earnings by 5% for FY2015 (Oct 2014 – Sep 2015) and 10% for FY2016 (Oct 2015 – Sep 2016). Changes in assumptions include: 1) lower depreciation expense from the delay of opening Terminal 2 at Don Mueang (from 4Q14 to 4Q15) and 2) 15% passenger growth in FY2015 (maintained) and 10% in FY2016 (revised up from 7%). We now assume 4% p.a. passenger growth during FY2022-33, underwritten by more expansion. Together with the rollover to end-2015, our TP rises to Bt330/share based on DCF valuation (WACC at 8.9% and long-term growth at 3%) from the mid-2015 TP of Bt245/share. Our sensitivity analysis suggests a 5% incremental growth in AOT’s passengers above our FY2015 assumption increases AOT’s core profit by 7%.

Share price new high, positives will push further. BUY. YTD, AOT’s share price has surged 65% and outperformed the SET by 34%, driven by its relatively resilient earnings despite the dimmer picture for Thai tourism. Though share price continues to rise to new highs, we believe positives lying in Thai tourism recovery and the uncovering of value from more expansion will be catalysts for AOT’s share price. We rate it BUY.