Thai Airways International

Thai Airways International Plc (THAI) 

 

Investment thesis

Key messages from a recent analyst meeting reaffirmed our views on the firm’s outlook. In our view, its business transformation plan is unlikely to bear fruit in the near term and we see execution risk, given the carrier’s inflexible cost structure and numerous stakeholder groups. Moreover, expectations of weak earnings this year will continue to make for uninspiring share-price performance. There is scope for downside to the FY15 forecast from further impairment loss on aircraft and mutual separation plan expenses. However, we think that the current share price which trades at a YE15 PBV of 0.9x—its long-term average but at a discount to the Asian mean of 1.3x—has already priced these in.    

Core operational improvement expected in 3Q15 despite bombing 

The negative impact on air travel demand from the recent Ratchaprasong bombing is expected to be short-lived, as the latest THAI air traffic statistics showed an only 1.8% decrease in bookings for August while the bookings for September remain at a normal level. THAI’s 3Q15 cabin factor is expected to rise both YoY and QoQ to above 75% against 71.1% in 3Q14 and 69.3% in 2Q15. In addition, the firm’s jet fuel cost is expected to drop 27% YoY to US$90/bbl. However, the jet fuel cost is expected to increase 14% QoQ, as the firm has hedged 85% of its 3Q15 jet consumption at the cost of US$95/bbl. While the passenger yield is expected to weaken YoY, due to high competition, it is expected to improve QoQ along with improving demand. As such, THAI’s 3Q15 core operation is expected to improve both YoY and QoQ (but remain in the red). 

Transformation plan in progress, but at a slow pace 

Management said that the firm had started implementing some of its transformation plan, which comprises a six-stage strategy (across 21 projects): 1) route & network management, 2) fleet rationalization, 3) commercial management, 4) operations & cost control, 5) organization management, and 6) portfolio management. The route & network stage has seen the most progress—THAI cut several unprofitable routes in 1H15, resulting in a 10% capacity decrease and this stage will continue in 2H15, when it will cut another 6% of capacity. But, management admitted that the remaining five stages were progressing only slowly, particularly revenue enhancement and cost reduction. It expects that passenger yield will improve from 4Q15 onward, driven by the revenue enhancement project. 

Balance sheet is weak, but capital raising is unlikely 

Even though THAI’s interest-bearing debt/equity ratio was as high as 5.9x as of end-June, management cite that the firm will still be able to raise more debt through bond issuance. THAI plans to issue Bt8bn in bonds in 2H15, after raising Bt7bn from a bond issuance in 1H15. In addition, the firm is also studying a potential asset divestment (as a backup plan for liquidity management). Given that, the raising of capital is unlikely.