Bangkok Airways

Bangkok Airways Plc (BA)

 

Investment thesis

Key messages from a recent analyst meeting reaffirmed our optimistic view on the carrier’s outlook. However, the recent negative news flow related to Thai tourism may generate negative sentiment toward the stock price in the short term. We think this offers a good opportunity for investors to accumulate the stock while its valuation is cheap—a YE15 PER (for airline and airport-related business) of only 9.9x, a discount to the regional average of 11.2x, as we believe tourist arrivals will rebound in a short period. Moreover, the firm’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. 

Samui high season to drive 3Q15 earnings 

As demand for travel to and within Thailand has continued to rebound to date in 2015 and the third quarter is normally high season for tourism on Samui Island, BA’s passenger numbers are expected to increase both YoY and QoQ in 3Q15. Note that forward bookings as of August 13 posted 19% growth YoY. In addition, the average seat fare is expected to rise further both YoY and QoQ along with demand growth. The greater portion of revenue from the Samui route would imply higher passenger yield for 3Q15, as the yield from that route is superior to that of BA’s other routes. Moreover, the average effective jet fuel cost is expected to drop 22% YoY and 6% QoQ to US$91/bbl. As such, we expect BA’s 3Q15 core profit to turn around from the core losses posted for 3Q14 and 2Q15.   

Network expansion through adding codeshare partners

BA has continued to expand its network by added codeshare partners, with five more starting to provide services in 2H15. They are Emirates Airlines (August), Air Astana (August), Austrian Airlines (September), China Eastern (November) and Korean Air (4Q15). Given that, BA will have 23 codeshare partners in total by YE15. The carrier will also in 2H15 add interline partner Juneyao Airlines, based in Shanghai, China. These agreements will strengthen BA’s capability to offer greater connectivity and frequency between Thailand and the carrier’s home countries. This would build scope for upside to BA’s passenger growth as well as earnings expansion over the long term. Moreover, this will increase BA’s diversification in terms of passenger revenue, which will mitigate the downside risk to its earnings. 

New route, boosted flight frequency and other growth drivers

Apart from increasing codeshare partners, BA will be adding a new route (Phuket-Hat Yai) and adding to flight frequency on existing routes from October onwards. The carrier will add frequency to Bangkok-Phuket (from eight to nine flights daily), Samui-Phuket (from 35 to 45 flights weekly), Samui-Singapore (from 10 to 12 flights weekly) and Samui-Hong Kong (from two to three flights daily, starting in February 2016). These moves will expand seat capacity to match high demand and also help boost passenger yield, as the firm should be able to command good pricing for the routes with high demand.