Airports of Thailand

Airports of Thailand Plc (AoT) 

Growth resuming, confirm BUY at DCF TP of Bt330/share. We see the 8% decline in share price from its recent peak in December 2014 as a good opportunity to accumulate. Catalyzing the share price will be the sharp recovery in operations provided by December’s return to double-digit growth in international passengers, halting the slide seen since January 2014. We expect strong earnings growth of 26% in FY2015 (October 2014 – September 2015) backed by Thai tourism recovery. Valuation is attractive at 1.0x 15PEG vs. 1.2x average for regional peers.

International passenger growth surges to double digits in December. AOT reports that over December 1-29, total passengers rose 16.1% YoY, mainly international passengers (60% of total passengers), showing an increase of 11.5% YoY, while domestic passengers (40% of total passengers) grew 23.3% YoY. The big news is the return to double-digit YoY growth for international passengers after trending down since January 2014, eroded by political uncertainty. This bodes well for operations, as revenue from international passenger service charges contributes ~40 of AOT’s total revenue vs. only ~5% for domestic passengers.

Minimal impact from fewer Russians. Supplying 6% of Thailand’s international arrivals, Russia’s economic problems are fostering concerns over the effect on Thai tourism. Through 2014, the number of Russian tourists into Thailand slipped YoY from April, with a sharp contraction of ~20% YoY in Aug–Nov as Russia’s economy began to unravel and its currency depreciated. 

We run a scenario to assess the downside to our forecast of AOT’s total passengers. If we assume the number of Russian tourists coming to Thailand falls to 1.0mn in 2015 - half our forecast of 2.0mn or -40% YoY from 2014’s 1.6mn, our calculations suggest downside of 2% to AOT’s total passengers and 3% to core earnings in FY2015. We view our scenario as the worst case: looking back at the past shows that Russian arrivals fell by a far lower 25% YoY after the tsunami in 2004 and 23% YoY during the global financial crisis in 2008-09.

Board approval of investment plan by mid-Jan 2015. Management plans to submit a revised Bt65bn investment plan for Suvarnabhumi Airport expansion to its board on January 21. The revised plan includes: 1) Bt28bn for a passenger terminal that will boost passenger capacity to 65mn/year from 45mn currently, 2) Bt19bn for parking bays to accommodate 28 more contact gates (from 124 currently) and 3) Bt18bn for a reserve runway. Once the board approves the plan, it will go to the State Enterprise Policy Committee (Super Board) and then the cabinet. The process will take about six months and, assuming it passes all steps, construction will start in 3Q15.