Bangkok Airways

Bangkok Airways Plc (BA) 

 

BA reported a good 1Q15 net profit of Bt1.07bn, 15% above our estimate (Bt933m). The key difference was a better EBITDAR margin than expected. We revise up our earnings estimates by 20-30% in 2015-16 and raise our TP to Bt22 (from Bt20.5). We also upgrade BA to Outperform from Neutral.  

 

Investment highlights 

 

- Net profit +108% YoY. The key growth drivers were: 1) a strong recovery in Pax number (+11% YoY); 2) higher cabin factor (+3% YoY to 72%); 3) avg. ticket price (-2% YoY); and 4) lower jet fuel expense (-9% YoY). 

 

- EBITDAR margin up YoY. Revenues increased 10% YoY, while costs rose only 1% YoY. A lower SG&A portion from 15% in 1Q14 to 12% in 1Q15 helped lift EBITDAR margin to 28% in 1Q15 from 24% in 1Q14. 

 

- Fuel expense -9% YoY. Fuel volumes increased 9% YoY in 1Q15, but a lower jet fuel price by around 20% YoY (at roughly US$100/bbl) resulted in total fuel expense declining 9% YoY in 1Q15. Fuel expense accounted for 30% of total cost of sales in 1Q15 (down from 33% in 1Q14).  

 

- EPS revised up in 2015-16E. We revise up earnings by 31% in 2015E and 23% in 2016E to reflect the good 1Q15 result and a lower SG&A assumption. In our model, we already factor in the negatives from the baht weakening to THB34/USD in 2015E and THB33.5/USD in 2016E and assume the jet fuel spot price at US$85/bbl in 2015E and US$100/bbl in 2016.  

 

- Baht weakness. We expect baht weakness to be negative to the airline sector as it causes a higher jet fuel expense. However, the company has a good natural hedge on revenues and expenses and no foreign currency debt. Thus we expect only a modest impact from baht depreciation on BA. According to our sensitivity analysis, every Bt1 weakness against the US$ will impact BA’s earnings by 8%. 

 

- Recent increase in jet fuel price in line with our forecast. The jet fuel spot price has gradually increased to US$80/bbl, or an average of US$70 YTD. This is still below our full-year forecast for a spot price of US$85/bbl in 2015.  

 

Valuation 

 

- We raise our TP to Bt22 (from Bt20.5) on a re-rating of the multiple in BA’s core business from 0.7x to 0.8x PBV. This reflects BA’s better earnings performance. As for the DCA issue, we still see it as an industry risk that could cap the upside for BA’s share price in the near term. But given BA has been certified as having met IOSA’s safety standards, we expect only a limited impact on the company. Note that we previously de-rated the PBV multiple from 1x to 0.7x due to our concerns about the ICAO’s warning to the Thai DCA. We will revisit our valuation again after knowing the result of the ICAO report in June 2015.  

 

- BA is now trading at a low adjusted PBV of 0.6x vs. an ROE of 8% in 2015E (for BA’s core operation). The stock offers upside of 11% to our new TP. We upgrade our rating to Outperform from Neutral.