Airports of Thailand

Airports of Thailand Plc (AOT)

Investment thesis
The current political confrontation may generate negative sentiment toward the stock in the near-term. But we expect the share price to regain momentum once the situation eases. Anticipation of strong earnings growth through 1H14, fueled by tourism high season, should continue to build the stock price going forward. Over the long-term, AOT’s hefty core profit expansion profile (an FY13-15 CAGR of 24% against 14% for the SET) will make for further share price appreciation. There would be scope for upside to our earnings forecast if PSCs were to increase. The stock currently trades at a forward PEG ratio of 1x, a discount to the regional average of 1.1x.   
Strong YoY core earnings growth expected for 4Q13
AOT should report a strong 4Q13 (July-Sept 2013) net profit of Bt5,438m, up by 252% YoY and 73% QoQ. Stripping out an assumed FX gain of Bt25m and the reversal of an impairment on Don Mueang Airport of Bt3,000m, core earnings would be Bt2,413m, up 55% YoY but down 12% QoQ. The driver of the expected YoY core growth was greater air traffic—passenger numbers increased by 18% YoY (and 5% QoQ) to 21.7m people and aircraft movement by 17% YoY (and 3% QoQ) to 143,570 flights. The assumed QoQ core profit slippage in the face of higher traffic numbers is due to the payment of staff bonuses.   
Momentum to be sustained through 1Q14 (Oct-Dec)
Strong earnings growth will continue through 1Q14 (Oct-Dec), fueled by high season for Thai tourism and greater YoY visitor arrivals. Historical data indicate that air traffic numbers typically rise by about 13% QoQ in the Oct-Dec quarter. AOT reported YoY passenger traffic growth of 14% for Oct and 11% for Nov 1-20. Apart from air traffic growth, operating expenses should normalize in 1Q14. We, therefore, expect the firm to post strong earnings expansion—both YoY and QoQ—for 1Q14. However, if the current political confrontation were to spiral into violence, there would be downside risk to 1Q14 numbers.   
The shorter the confrontation period, the less the risk to 1Q14 profit  
Our study shows that mass political demonstrations cause air traffic numbers and AOT’s share price to decline. In the period following the Yellow Shirt invasion of Suvarnabhumi and Don Mueang airports in late 2008, air traffic numbers were subdued for three months and AOT’s stock traded at a discount for four months. Following the violent Red Shirt uprising of 2010, traffic numbers and the firm’s valuation multiples were subdued for three months.
However, both traffic and AOT’s share price rebounded strongly thereafter on both occasions. Traffic and the share price bounced by 20% and 24%, respectively, after the 2008 event, while traffic and the share price rebounded by 17% and 24%, respectively, following the 2010 uprising. We expect history to repeat itself this time round.