Thai Airways International

Thai Airways International Plc (THAI)

Investment thesis: In our view, expectations of a bottom-line turnaround in 3Q12 and QoQ earnings growth in 4Q12 (high season) will catalyze the share price in the near-term. In addition, the forecast FY12-14 earnings CAGR of 32%, driven by capacity expansion and yield improvement, should boost the share price further. THAI currently trades at a YE13 PBV/ROE of 0.08x and EV/EBITDA of 4.9x, discounts to its long-term averages and the regional means.
Laggard play within transportation sector: High oil prices in 1Q12 and weak 2Q12 earnings have put downward pressure on THAI’s share price since the beginning of this year. But we are now at the start of high season for tourism. The share prices of other air transport operators have already rallied. We expect THAI’s stock price to follow suit.

Tourism high season to boost seasonal trade: The Asian tourism high season runs from the fourth-quarter through the first quarter of the following year. The trading patterns of regional airline stocks reflect seasonal demand dynamics. Assuming that the historical pattern holds true, we can expect seasonally high demand combined with a greater passenger yield should push up THAI’s stock price, 4Q12 through 1Q13.

Lower oil price positive to share price (plus hedging opportunity): There is a negative correlation between THAI’s share price movements and the cost of jet fuel. As we anticipate that oil prices will move sideways-down in 4Q12, we tactically expect THAI’s stock price to move in the opposite direction. Also, declining oil prices would present an opportunity for THAI to buy hedging contracts for jet fuel for consumption through FY13.
Rising regional demand outweighing weaker demand from Europe: Despite the global economic slowdown, overall demand for traveling via THAI continued to rise YoY in 1H12. Increasing revenue from Asia more than offset the effect of falling business from Europe. As such, we don’t think THAI will be materially impacted by the EU debt crisis.

Outlook
Laggard play in Transport (ground & air) sector: High oil prices in 1Q12 and weak 2Q12 earnings have put downward pressure on THAI’s share price since the beginning of this year. The stock has underperformed the broad SET by 13% and the Thai Transport (ground & air) sector by 27% in the year-to-date.
But we are now at the start of high season for tourism. The share prices of other air transport operators (AOT and AAV) have already rallied.
We expect THAI’s share price to follow suit.

Recommendation and valuation
Initiated coverage with TRADING BUY rating (YE13 target price of Bt27): In our view, expectations of a bottom-line turnaround in 3Q12 and QoQ earnings growth in 4Q12 (high season) will catalyze the share price in the near-term. In addition, the forecast FY12-14 earnings CAGR of 32%, driven by capacity expansion and yield improvement, should boost the share price further.
THAI currently trades at a YE13 PBV/ROE of 0.08x, a discount to the regional mean of 0.11x. Its YE13 EV/EBITDA is 4.9x, discounts to both its long-term average of 7.1x and the regional mean of 6.6x. We have, therefore, re-initiated THAI coverage with a TRADING BUY rating and a YE13 target price of Bt27, based on a 10% discount to its long-term average PBV. We think THAI deserves to trade a discount to its long-term average PBV, as it is in the early stage of a recovery in the face of some global economic uncertainty.