Thai Airways International

Thai Airways International Plc (THAI) 

 

Above expectations

THAI posted a 1Q15 net profit of Bt4,541m, a reversal from net losses posted for 1Q14 and 4Q14. Stripping out an FX gain of Bt9.6bn and an impairment loss on aircraft amounting to Bt11.8bn, 1Q15 core profit was Bt6,691m, a U-turn from core losses posted for 1Q14 and 4Q14. The result was above our forecast and that of the consensus, due to a larger-than-expected tax credit. 

Results highlights

The key drivers for the core earnings turnaround were: 1) higher passenger traffic, 2) lower operating expenses, 3) lower SG&A expenses, and 4) a larger tax credit. THAI’s 1Q15 revenue passenger kilometers (RPK) were 16,489m, a rise of 12% YoY and 6% QoQ, while the cabin factor was 75.4%, up from 70.1% in 1Q14 and 71.1% in 4Q14. But, passenger yield declined 5% YoY and 1% QoQ to Bt2.60/RPK. Also, total operating expenses fell 13% YoY and 18% QoQ, led by lower jet fuel cost, which slid 41% YoY and 31% QoQ to US$73/bbl. Meanwhile, the SG&A/sales ratio declined to 4.5% from 5.4% in 4Q14. The firm also booked a tax credit of Bt2.3bn in 1Q15 against a Bt2.6bn tax expense in 1Q14 and a tax credit of Bt977m in 4Q14. 

Outlook

We expect THAI to post YoY passenger growth in 2Q15, driven by broad demand recovery. Air traffic numbers among Thai air transport operators have continued to advance in 2Q15-to-date—AOT’s total passenger numbers rose 22% YoY. In addition, we expect THAI’s jet price to decline YoY. As such, we expect THAI’s 2Q15 core operation to improve YoY (but to remain in red ink). On a QoQ basis, the firm’s 2Q15 core operation is expected to reverse into loss, due to Thai tourism’s low season. Despite that, the expected QoQ lower effective jet fuel price in 2Q15 should mitigate the impact of low seasonality. 

What’s changed?

While we have slashed our FY15 forecast to a net loss of Bt443m (from net profit of Bt7,087m) to reflect the impairment loss on aircraft booked in 1Q15, we have raised our core earnings forecast to Bt1,707m (from a core loss of Bt2,512m) to fine-tune the tax credit booked in 1Q15. Our YE15 target price is cut to Bt12.40 (from Bt15)—pegged to a YE15 adjusted PBV of 0.8x, its long-term average. There is a scope for downside to the FY15 forecast from a further impairment loss on aircraft.

Investment thesis

Expectations of weak THAI FY15-FY16 earnings will continue to make for uninspiring share-price performance. Moreover, its business restructuring plan is unlikely to bear fruit in the near term and we see execution risk, given the carrier’s inflexible cost structure and numerous stakeholder groups. The stock currently trades at a YE15 PBV of 0.9x—close to its long-term average and at a discount to the Asian mean of 1.5x.