Thai Airways International

Thai Airways International Plc (THAI)

Investment thesis

Expectations of weak FY14-FY15 earnings will continue to make for uninspiring share price performance. Moreover, THAI’s business restructuring plan is unlikely to bear fruit in the near term and we see execution risk, given the firm’s inflexible cost structure and numerous stakeholder groups. The stock currently trades at a YE15 PBV of 0.8x—on par with its long-term average but discount to the Asian mean of 1.5x.    

4Q14 operational improvement expected, but still in red ink

We expect THAI to report a 4Q14 net loss of Bt2,706m, shallower YoY but a reversal from the net profit posted for 3Q14. Minus an expected FX gain of Bt3,200m, 4Q14 core loss would be Bt5,906m, deeper YoY and QoQ. The key factors behind the YoY weaker core operational performance were: 1) lower passenger numbers and 2) weaker passenger yield. THAI’s 4Q14 RPK was 15,027m, down 5% YoY, while the cabin factor was 71.1%, stable YoY. In addition, the passenger yield is expected to decrease 2% YoY to Bt2.62/RPK. 

Meanwhile, the QoQ deeper core loss was due to higher operating expenses. Total operating expenses are expected to rise 7% QoQ. However, operational statistics showed a QoQ improvement—RPK rose 6% QoQ and passenger yield is expected to increase 2% QoQ. Also, jet fuel cost decreased 15% QoQ to US$106/bbl. 

Core operation to improve further in 1Q15

As the Thai tourism high season usually lasts through the first quarter of each calendar year, we therefore expect foreign visitor arrivals and THAI’s passenger numbers to increase further in 1Q15, both YoY and QoQ. Thai air transport operators’ air traffic numbers have continued to improve from 1Q15 to date—AOT statistics for January 2015 expanded further—total passenger numbers rose 18% YoY (2% MoM) compared to the 16% YoY growth in December 2014 and the 3% YoY growth in FY14. Also, we expect THAI’s jet fuel cost to decline YoY and QoQ. As such, we expect THAI’s 1Q15 core operations to improve YoY and QoQ, but they will stay in the red.   

Slow operation improvement prompts forecast downgrades 

As THAI is going through a period of transformation and we think that such operational improvements will be slow, we have downgraded our key assumptions for FY15 and now expect FY15 net loss of Bt5.7bn (from net profit forecast of Bt2.7bn previously) (Figure 2). We have also cut our YE15 target price to Bt14 (from Bt15)—pegged to a PBV of 0.8x, its long-term average.