Thai Airways International

Thai Airways International Plc (THAI)

In line with estimates
THAI posted a 2Q13 net loss of Bt8,439m, deeper YoY and a reversal from the net profit posted for 1Q13. Stripping out an FX loss of Bt4,203m, impairments on aircraft and assets of Bt1,404m and a gain on deemed disposal of Bt722m, the 2Q13 core loss would be Bt3,554m, deeper YoY and a reversal from the core profit posted for 1Q13. The numbers were in line with our model and the consensus.
Results highlights
The key factors behind the weaker core operational performance were: 1) lower traffic numbers, 2) a weaker passenger yield, 3) heavier SG&A expenses and 4) higher interest expenses. Passenger traffic increased 4% YoY but fell 12% QoQ to 14,732m RPK, while the cabin factor declined to 70.5% in 2Q13 from 75.1% in 2Q12 and 79.8% in 1Q13. The passenger yield (including fuel and insurance surcharges) weakened by 3% YoY and 8% QoQ to Bt2.57/RPK. The SG&A/sales ratio rose to 4.6% in 2Q13 from 3.5% in 2Q12 and 4% in 1Q13. Finally, interest expenses increased by 6% YoY and 8% QoQ, due to higher debts outstanding.
Outlook
Even though the third-quarter remains low season for both Thai tourism and THAI, historical data indicate that the firm’s passenger traffic numbers normally increase by about 10% QoQ in the period. We, therefore, expect its 3Q13 core operation to improve QoQ, driven by air traffic growth and capacity management. The cabin factor for July was 75%, while forward bookings for August and Sept are 70% and 50%, respectively. As such, the 3Q13 cabin factor should improve QoQ (flattish YoY) from the 70.5% posted for 2Q13. 
What’s changed?
We have slashed our FY13 net profit forecast by 65% to Bt2,087m and our core profit projection by 52% to Bt2,913m to factor in: 1) extra losses booked in 1H13, 2) a 3% diminished passengers-carried assumption (now 21.7m) and 3) a 4% cut to our passenger yield expectation to Bt2.67/RPK. Consequently, our revised YE13 target price declines to Bt26 from Bt31, pegged to a PBV of 0.8x (THAI’s long-term average).  We expect a consensus earnings forecast downgrade.
Investment thesis
Anticipation of a QoQ core operational improvement in 3Q13 together with the upcoming high season of Thai tourism should catalyze the share price going forward. THAI now trades at a YE13 PBV of 0.6x—discounts to its long-term average and the regional mean of 1.0x—which prices in the weak 2Q13 numbers. As such, downside risk to the share price appears limited.