Thai Airways International

Thai Airways International Plc (THAI)

Investment thesis
The key messages at the analyst meeting last Friday reaffirmed our positive view toward THAI. Expectations of an earnings improvement in 1Q13 (high season) and the upcoming listing of Nok Air will catalyze the share price in the near-term. Furthermore, the forecast FY13-15 earnings CAGR of 32% (comparable with the profiles of regional peers, but better than projected broad SET profit growth of 8% over the same period)—driven by capacity expansion and a yield improvement—should push up the stock price.
Valuation-wise, THAI currently trades at an YE13 PBV of 0.8x and an EV/EBITDA ratio of 5.5x, discounts to regional means (combined full service and low-cost carriers) of 1.2x and 7.2x, respectively.   
Expect a core earnings improvement 
For 1Q13, we anticipate that THAI will report stronger YoY core earnings and a turnaround from the core loss it posted for 4Q12, driven by an increased cabin factor, a fatter passenger yield, and lower personnel expenses (no one-time bonuses are to be booked for the quarter). We model that the cabin factor rose to 79.9% in 1Q13 from 78.2% in 1Q12 and 76.3% in 4Q12 and that the passenger yield expanded to Bt2.85/km in 1Q13 from Bt2.75/km in 1Q12 and Bt2.76/km in 4Q12.
YoY operational improvement expected through 2Q13
Even though the second-quarter is normally low season for Thai tourism and THAI, we expect the firm’s 2Q13 core operation to improve YoY, driven by fleet expansion, capacity management, and an upward adjustment to the fuel surcharge. Based on forward bookings of 70% for April and 67% for May, we model that the 2Q13 cabin factor will improve YoY (the cabin factor was 75.1% in 2Q12). Moreover, the passenger yield should be supported by an increase to the fuel surcharge (within the range of US$2-12/trip), effective April 2013.
In addition, we think that oil price weakness in 2Q13 (due to low seasonal demand and a heavy maintenance shutdown schedule for Asian refineries) could bring upside to THAI’s core operation for the quarter.  
Target price upgrade on improving operational outlook  
In our view, given its comparable earnings growth profile, THAI deserves to trade on a par with the regional average of full-service airlines. We have, therefore, re-rated its PBV peg to 1.0x (from 0.8x) and derived a new YE13 target price of Bt34 (up from Bt27). There is also scope for upside to THAI’s valuation from the listing of Nok Air.