Airports of Thailand

Airports of Thailand Plc (AOT) 

 

Investment thesis

As the second quarter is normally a low season for Thai tourism and thus AOT’s earnings are expected to weaken QoQ in the April-June quarter, in our view, there will be no short-term catalysts for the share price. However, the substantial air-traffic-growth momentum in FY15, together with the strong core earnings growth profile of 20% CAGR during FY15-17, should support the share price going forward. AOT’s current valuation is attractive—the stock trades at an end-September 2015 PER of 27.1x, a discount to the regional average of 31.7x and a forward PBV/ROE of 0.26x, a discount to the regional mean of 0.32x. We therefore upgrade our rating to BUY from HOLD with a revised end-September 2015 DCF-derived target price of Bt330 and we would recommend investors to accumulate the stock during the low season. 

Strong air-traffic-growth momentum to go on through May …

The broad demand recovery for travel to and within Thailand has driven the strong air-traffic-growth momentum post 2014’s political unrest. AOT’s air traffic statistics for 8M15 (Oct 2014-May 2015) posted substantial growth YoY—passenger numbers rose 20% YoY to 72m while aircraft movement rose 12% YoY to 471,501 flights, fueled by international and domestic traffic (Figure 1). Note also that AOT’s passenger growth for May was 29% YoY and aircraft movement growth was 18% YoY. 

This strong momentum is expected to go on throughout the firm’s fiscal year end in September. Thus, we have revised up our air-traffic-growth assumptions for FY15—raised the passenger growth assumption to 19% (from 10%) and the aircraft movement growth assumption to 18% (from 10%). We have also upgraded our FY15 net profit forecast 15% to Bt15,976m and our long-term earnings forecast 15% in average (Figure 2).  

… but short-term traffic and earnings is trending down 

As we are now in the low season of Thai tourism, which normally lasts through the third quarter of each calendar year, the air traffic numbers typically weaken QoQ in the short term. Historical data suggest that AOT’s passenger traffic decreases ~11% QoQ in the second quarter and its aircraft movement declines ~4% QoQ during the same period (Figure 3). As such, we expect the firm to post a QoQ core earnings contraction for the April-June quarter (3QFY15). 

Accumulating the stock during the tourism low season  

Our study indicated that AOT’s share price has strong positive correlation (+86% correlation for a 10-year horizon and +92% for a 1-year horizon) with the firm’s passenger numbers (Figure 4). We therefore expect the share price to soften in the short term and we would recommend that investors accumulate the stock during the low season. We expect the share price to regain momentum once the high season kicks in in the fourth quarter.