Thai Airways International

Thai Airways International Plc (THAI)

Maintain BUY. We expect 1Q13 net profit to be strongest in the air transport sectorThai Airways Internationalat Bt6-7bn (vs Bt3.7bn in 1Q12 and Bt2.3 in 4Q12), backed by core earnings of Bt2bn
and FX gains of Bt4-5bn. Taking into account its huge FX gains in 1Q13, we raised our
2013 projection to Bt8bn from Bt4bn. With this revision, we get a new 12-month PT of
Bt35 (from Bt30), based on 1x PBV (vs. its 10-year PBV of 1.1x). We like THAI for its
operational improvement, a laggard play in the tourism-related industry and
attractive valuation. Another short-term catalyst is the listing of Nok Air (currently 49%
held by THAI) within the next few months.
Improvement seen in 2013YTD. THAI’s cabin factor picked up to 79% in January and
80% in February from 78% in 1Q12 and 76% in 4Q12. Forward bookings reached 80% in
March, 70% in April and 67% in May, implying strong cabin factor ahead. In 1Q13, its
passenger yield is estimated to reach Bt2.8/RPK (vs Bt2.76/RPK in 1Q12 and 4Q12). Jet
fuel costs are not yet a concern, as prices are relatively stable so far this year and it has
also taken on a 2013 fuel hedging position of ~70% (68% in 1H13 and 71% in 2H13).
Net positive from THB appreciation. THAI is positioned to benefit from the baht
appreciation, mainly off its foreign currency debt. Since earnings are also exposed to
foreign currencies, THAI estimates that a 1% THB appreciation erodes core operations
by Bt34mn/month. However, this is more than offset by Bt74bn in FX gains from its
foreign currency-denominated loans after swap (Bt54bn in EUR, Bt18bn in JPY and
Bt1.5bn in US$) at the end of Feb 2013. Based on the appreciation of the baht against
foreign currencies to date in 1Q13, we roughly estimate core earnings impact at
-Bt700mn but FX gains at +Bt4-5bn.
2013 developments. In 2013, THAI will continue to focus on route adjustment by
switching from some loss-making routes to more profitable routes in regional
markets (42% of its routes in 2012 vs 39% in 2011), notably to Japan, China, Russia and
India. It also targets a better ticket selling system i.e. boosting internet sales from
currently 8% of sales to 15% in the longer term. Product improvement will be seen
upon the delivery of new planes and completion of the retrofit program in mid- 2013.
These should help enhance its cabin factor and passenger yield for the rest of the year.
Laggard play with attractive valuation. THAI is the most laggard play in the
tourism-related industry. In the past 12 months, THAI’s share price picked up by 10%,
compared to other air transport players (AOT +113% and AAV +95%), hotel operators
(CENTEL +200%, ERW +115%, MINT +84%) and the SET (+30%). Against regional airline
peers, THAI is one of the cheapest airlines, trading at 0.8x 2013PBV vs. peers at 1.2x and
6x 2013 EV/EBITDA vs. peers at 9x.