Thai Airways International

Thai Airways International Plc (THAI)
Investment thesis
The key messages at the analyst meeting yesterday reaffirmed our optimistic view of THAI’s operation going forward. Anticipation of a QoQ core operational improvement in 3Q13 together with the upcoming high season for Thai tourism should catalyze the share price soon. THAI currently trades at a YE13 PBV of 0.6x—discounts to both its long-term average and to the regional mean of 1.0x. As such, downside risk to the share price appears limited.   
Earnings bottomed out; QoQ improvement expected in 3Q13
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. As such, the carrier’s earnings should have bottomed out and we expect its 3Q13 core operation to improve QoQ, driven by air traffic growth and better capacity management. We expect a cabin factor for 3Q13 of 74.8%, up from 70.5% in 2Q13. Furthermore, the 3Q13 passenger yield should rise QoQ to Bt2.61/RPK from the Bt2.57/RPK posted for 2Q13. However, we anticipate that 3Q13 earnings will weaken YoY, due mainly to a lower passenger yield.  
Earnings growth momentum will be sustained through 4Q13   
The fourth-quarter is high season for Thai tourism and for THAI. Historical data show that the firm’s passenger traffic numbers normally expand by about 11% QoQ during the period. Note that forward bookings for Oct and Nov (as of now) are 60% and 50%, respectively, which augers well for the months leading up to Christmas. Moreover, the passenger yield almost always rises QoQ during the fourth-quarter.
Extensive fuel hedging to mitigate downside risk to core profit
THAI has fuel hedging contracts for 2H13 covering 90% of its forecast jet fuel consumption needs (at a jet fuel price range of US$95-130/bbl), compared to 67% for 1H13. The firm has also started taking out fuel hedging contracts for 1Q14; they currently cover 30% of its expected jet fuel consumption needs for that quarter. Given that the second-half of the year is normally high season for oil demand, the heavy hedging strategy will protect core earnings from downside risk tied to rising crude and refined petroleum product prices.
If THAI were to sell old aircraft, impairments on sales would dampen the bottom-line. Also, recent baht depreciation might make for some squeeze on future net earnings.