Airports of Thailand

Airports of Thailand Plc (AOT) 

 

Investment thesis

In our view, the recent share price correction on concerns over the impact from the Ratchaprasong bombing and the diminishing expectation for growth outlook of concession revenue is overblown. As we believe that the impact from the bombing will be short-lived and the potential impact from the lower concession revenue will be minimal. We think therefore that the current share price—which trades at an end-September 2015 PER of 23.7x, close to 2014 trough (when there was a Martial Law enforcement and the passenger numbers were 30% lower) and a deep discount to the regional average of 31.7x—offers a good opportunity for investors to accumulate the stock ahead of the upcoming high season in October. 

Strong air-traffic-growth momentum is sustained to date

The broad demand recovery for travel to and within Thailand has driven the strong air-traffic-growth momentum. AOT’s air traffic statistics for 10M15 (October 2014-July 2015) posted substantial growth YoY—passenger numbers rose 22% YoY to 89m while aircraft movement rose 15% YoY to 588,800 flights. This strong momentum continued through August before the Ratchaprasong bombing—AOT posted a substantial passenger growth of 27% YoY from 1-17 August. However, air traffic numbers weakened in the week since the bombing—international passenger numbers decreased 15% compared to the numbers in early August, while domestic passenger numbers declined 8%. Despite that, passenger growth remained strong at 25.8% YoY during the period.   

Impact from bombing expected to be short-lived 

Historical evidence indicates that air traffic rebounds swiftly after a period of violence or intense political confrontation. Passenger traffic dropped around 15% MoM for two months during the peak of each incident, but then bounced back by an average of 15% within the next two-three months. Likewise, AOT’s share price reacted negatively to political unrest/violent incidents—decreasing only 8-15% during the next one-two weeks after such incidents, but then rebounded to pre-incident level within the next two weeks.  If the historical pattern were to play out this time, we would expect air traffic to rebound within the next few months. We therefore expect air traffic as well as AOT’s share price to regain strong growth momentum when the high season of Thai tourism starts in October.

Concern over poor growth outlook for concession revenue is inflated

Our scenario analysis suggests that under the worst-case scenario, which  assumes no growth in concession revenue from 2016-2024, AOT’s bottom-line will decrease 4% on average from our base-case forecast and the DCF-derived target price will decline to Bt314/share (from our base case target price of Bt330/share). We therefore think that the recent share price correction (down 17% over the past two months) is overblown.