Thai Airways International

Thai Airways International Plc (THAI)

Investment thesis
The key messages at the analyst meeting last Friday reaffirmed our optimistic view toward THAI’s operation. Expectations of a YoY core earnings improvement in 2Q13 and the upcoming SET 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 better yield—should push up the stock price. Valuation-wise, the firm currently trades at an FY13 PER of 12.8x and a PBV of 0.8x, discounts to the regional means (combined full-service and low-cost carriers) of 15.5x and 1.0x, respectively.   
Expect YoY core operational improvement in 2Q13
The second-quarter is normally low season for Thai tourism and THAI, but we expect its 2Q13 core operation to improve YoY, driven by fleet expansion, capacity management, and a better passenger yield. The cabin factor was 75.8% in April and 67% in May; it is expected to improve MoM in June through capacity management. As such, the 2Q13 cabin factor is expected to be about 70%. However, the cabin factor in 2Q13 will probably be lower than the 75.1% posted for 2Q12, due to a larger fleet. Note that passenger traffic continues to grow in YoY terms.
The 2Q13 passenger yield is expected to inch up YoY to Bt2.67/km from Bt2.64/km in 2Q12. In addition, we think that oil price weakness in 2Q13 could bring upside to THAI’s core operation for the quarter. However, an FX loss caused by recent baht depreciation may squeeze the 2Q13 bottom-line somewhat.  
A prime beneficiary of the upcoming Japan visa exemption  
The Japanese government recently announced that it will exempt Thais from having to obtain visas for short stays. The effective date of the implementation and the length of stay-without-visa are expected to be announced within the next month or two. Japan routes are already bread & butter revenue earners for THAI; there should be greater demand for travel to Japan with the visa requirement waived. During 4M13, 140k Thai tourists visited Japan, compared to 300k for the whole of 2012.
Fuel hedging to protect core earnings against downside risk
THAI has extensive fuel hedging agreements for 2H13 covering 90% of its forecast jet fuel consumption needs (at a jet fuel price range of US$95-125/bbl), compared to 67% for 1H13. Given that the second-half of the year is normally high season for oil demand, we think the heavy hedging strategy will protect core earnings from downside risk. Nonetheless, if THAI were to sell old aircraft, impairments on sales would dampen the bottom-line.