Bangkok Airways

Bangkok Airways Plc (BA) 

 

Investment thesis

Key messages from a recent analyst meeting reaffirmed our optimistic view on the carrier’s outlook for both the short and long terms. However, as we are now in Thai tourism’s low season and the firm’s QoQ earnings momentum are expected to soften, we think therefore that there will be no obvious catalysts for the share price in the near term. Yet, the carrier’s strong earnings growth profile of 44% CAGR in FY14-16, driven by a sharp rebound in air-traffic growth, should continue to support the share price. The stock trades at an FY15 PER (for airline and airport-related business) of 10.9x, a discount to the regional average of 11.8x. We thus believe that any share price weakness during the low season would offer a good opportunity for investors to accumulate the stock.    

YoY operational gains expected for 2Q15 

Even though BA’s 2Q15 earnings are expected to soften QoQ, due to Thai tourism’s low season, the firm is expected to post substantial YoY earnings improvement (turnaround to profit) in 2Q15. The key drivers would be greater passenger numbers, lower operating cost, and lower jet fuel price. The air traffic numbers reported by Thai air transport operators have continued to grow in 2Q15-to-date—AOT’s total passenger numbers rose 22% YoY. Moreover, the operating cost (excluding fuel cost) is expected to decline YoY, to be brought about by a cost reduction program. The jet-fuel price is also expected to decrease 18% YoY to US$98/bbl.   

Expanded code-share network to boost growth prospects

Apart from China Airlines (Taiwan) and Jet Airways (India), which have become BA’s 17th and 18th code-share partners since March and May, respectively, there are four more potential code-sharing partners in the pipeline. The carrier expects Austrian Airlines and Air Astana (Kazakhstan) to sign on in 2Q15, Korean Air (South Korea) in 3Q15 and China Eastern Airlines in 4Q15. These agreements will strengthen BA’s capability to offer greater connectivity and frequency between Thailand and those countries. This would build scope for upside to BA’s passenger growth as well as earnings expansion over the long term. 

In addition, BA was invited by the oneworld® airline alliance to participate in its Global Explorer round-the-world fare offered by all member airlines and selected other carriers in May. This will open up opportunities for BA to gain exposure and draw traffic globally. 

Expect no material impact from ICAO audit

Although there are concerns about the potential negative impact from the ICAO audit, all related parties have been working seriously to solve the outstanding problems. Management said that the material impact of this issue on BA was unlikely, given that BA had been certified by the IOSA, whose standards are far more stringent than those of the ICAO. Management is therefore confident that BA will be able to continue its operations as usual going forward.