Bangkok Airways

Investment thesis

We fundamentally like BA for its strong core earnings growth profile—a 44% CAGR during FY14-16 against 11% for the SET and a 20% regional peer mean. In the interim, expectations of hefty profit expansion through 1Q15, buoyed by tourism high season and a broad recovery in visitor arrivals to Thailand should boost the share price. Note that there is scope for upside to our FY15-16 earnings forecasts from the recently approved daily flight increase at Samui Airport. 

Valuation-wise, BA currently trades at an FY15 PER (for airline and airport-related business) of only 12.5x, a 23% discount to the regional average of 16.3x. In our view, the stock deserves a premium to the Asian mean because of its superior earnings growth profile. We have, therefore, initiated coverage with a BUY rating and an SOTP-derived YE15 target price of Bt27.    

Route network & fleet expansion to fuel future growth 

BA will add to both its route network and its fleet of aircraft in order to cater to growing demand. Increasing flight frequency and route network expansion to new destinations comprise a key business strategy. New routes will strengthen BA’s competitive edge, as they will create further opportunities in a regional market that is growing in both scope and scale. Moreover, BA plans to expand its fleet to next-generation fuel-efficient aircraft—from 25 airplanes at YE13 to 43 by YE18. Beyond its own route network, the firm has additional passengers through code-sharing agreements with other carriers.

Samui Airport—the jewel in BA’s crown 

Samui Airport is BA’s most important, both in terms of passenger traffic and revenue generation. There remains considerable scope for more passenger traffic and aircraft movement through Samui Airport. BA recently won approval to operate additional flights to and from Samui Airport. In addition to current routes, for which there is little or no competition, the firm plans to expand the Samui route network to destinations in North Asia, particularly China. 

Airport-related services enhance profits 

Apart from its airline business, BA has built value by providing airport-related services at Suvarnabhumi Airport, such as catering, international ground services and international cargo terminal handling. The earnings from these airport-related operations have major potential for growth, in tandem with the expansion of passenger numbers, aircraft movement and cargo handling at Suvarnabhumi. Given the subdued competitive environment for these airport-related service businesses, their margins should—at worst—be stable.

Dividend income & exciting growth stories 

BA has investments that yield good dividends and have scope for earnings growth—Samui Airport Property Fund and Bangkok Dusit Medical Services. The investments may also present opportunities for the company to establish footprints in new businesses.