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Thai Airways Thailand Company Focus Thai Airways Bloomberg: THAI TB | Reuters: THAI.BK DBS Group Research . Equity 18 Jan 2011 BUY Bt44.75 SET : 1,023.19 Strong momentum in FY11F Price Target : 12-month Bt 64.50 Strong growth in FY11F with easing political Reason for Report : Post conference note uncertainty and supportive industry fundamentals. Potential Catalyst: Launching low cost airlines, and exit from SOE status. 4Q10F to soften but momentum will pick up ahead. Analyst Trading at 1.1x P/BV, below peers’ average of 1.6x; Nalyne Viriyasathien +662 657 7823 [email protected] maintain Buy rating for upside to Bt64.50 TP Positive response from investors. Mr. Raj Tanta-Nanta (VP) represented THAI at our DBSV POA Conference in Singapore on 13 Jan11 with excellent investors’ response. THAI will focus on expanding yields, fleet modernization, Price Relative improve fuel-hedging, exiting from SOE status and launch of low cost airlines to capture the lower income market. Bt Relative Index We expect FY11F core profit to grow 37% y-o-y to 220 55 . 80 Bt12.4bn as easing political uncertainty and an improving 45 . 80 170 economy will boost operations. 35 . 80 120 25 . 80 What would have been the 70 A softer 4Q10F but still decent. 15 . 80 peak season was unfortunately affected by flooding in many 5 . 80 20 parts of Thailand in Oct-Nov10, hance lowering travel 2007 2008 2009 2010 2011 demand and driving cabin load factors down to 73.8% (vs Thai Airways ( LHS ) Relative SET INDEX ( RHS ) 75.4% a year ago). It would also book a Bt1.8bn provision in Forecasts and Valuation 4Q10 relating to its employee early retirement plan. Despite these factors, 4Q10F result should remain strong as (i) ASK is FY Dec (Bt m) 2009A 2010F 2011F 2012F expected to rise 5% q-o-q and 3% y-o-y, (ii) passenger yields Turnover 161,603 179,131 195,269 205,836 EBITDA 31,758 39,310 46,952 51,444 should increase to Bt2.18/km in 4Q10F vs Bt2.03 in 3Q10 Pre-tax Profit 8,107 17,765 17,877 20,884 and Bt2.17 in 4Q09, and (iii) c.Bt800m gain (potential to be Net Profit 7,344 14,813 12,384 14,490 revised higher) from the reversal of a provision for an anti- Net Pft (Pre Ex.) 4,705 9,061 12,384 14,490 trust lawsuit as the European Commission (EC) dropped EPS (Bt) 4.3 6.8 5.7 6.6 charges against THAI in Oct10. EPS Pre Ex. (Bt) 2.8 4.2 5.7 6.6 EPS Gth Pre Ex (%) nm 50 37 17 Diluted EPS (Bt) 4.3 6.8 5.7 6.6 Reiterate Buy. We are retaining our Bt64.50 target price Net DPS (Bt) 0.3 0.9 1.5 1.7 that is pegged to 1.5x FY11F PBV, in line with regional BV Per Share (Bt) 31.4 37.2 42.0 47.2 peers’ average and its 7-year average historical PBV +1SD, PE (X) 10.4 6.6 7.9 6.7 implying 44% upside potential. Share price contracted PE Pre Ex. (X) 16.2 10.8 7.9 6.7 recently (-9% YTD) on expectation of a soft 4Q10F and P/Cash Flow (X) 2.7 2.7 2.7 2.5 EV/EBITDA (X) 6.8 5.5 4.3 4.1 concerns of rising fuel prices. We remain upbeat on THAI, Net Div Yield (%) 0.6 2.0 3.4 3.7 as moving into FY11F, operations should start to strenthen P/Book Value (X) 1.4 1.2 1.1 0.9 while fuel expenses should be efficiently handled by its Net Debt/Equity (X) 2.6 1.4 1.1 1.1 improved hedging policy. Valuations remain attractive at ROAE (%) 14.9 22.1 14.4 15.0 1.1x P/BV and 4.3x EV/EBITDA, below regional peers’ average of 1.6x and 7x, respectively. Earnings Rev (%): - - - Consensus EPS (Bt): 5.5 5.6 7.0 At A Glance ICB Industry : Consumer Services Issued Capital (m shrs) 2,183 ICB Sector: Travel & Leisure Mkt. Cap (Btm/US$m) 97,679 / 3,210 Principal Business: THAI operates domestic, regional and intercontinental flights to key destinations around the world and Major Shareholders within Thailand. Ministry of Finance (%) 51.0 Source of all data: Company, DBS Vickers, Bloomberg Vayupak Fund (%) 17.0 Thai NVDR (%) 4.2 Free Float (%) 27.4 Avg. Daily Vol.(‘000) 8,240 “In Singapore, this research report or research analyses may only be distributed “Recipients of this report, received from DBS Vickers Research (Singapore) Pte Ltd to Institutional Investors, Expert Investors or Accredited Investors as defined in the (“DBSVR”), are to contact DBSVR at +65 6398 7954 in respect of any matters arising Securities and Futures Act, Chapter 289 of Singapore.” from or in connection with this report.” www.dbsvickers.com Refer to important disclosures at the end of this report ed: JS / sa: CS Company Focus Thai Airways Pulse of Asia Conference – Singapore surcharge provides over 100% coverage of fuel cost as of Dec10. Positive response from investors. Mr. Raj Tanta-Nanta (Vice President, Investor Relations) represented Thai Airways (THAI THAI: Jet fuel price TB) in our DBSV Pulse of Asia Conference held in Singapore US$/bbl on 13 Jan 2011. Response from investors was excellent with all slots taken up. The management briefed investors on the 200 180 robust turnaround of its operations last year (FY10F), and the 160 positive momentum going forward given supportive industry 140 fundamentals as well as continued improvement in executing 120 100 the company’s strategy. Frequently asked questions centred 80 on the launch of Thai-Tiger airline, fuel hedging policy, 60 operations in 4Q10F and outlook as well as strategies going 40 20 forward. 0 07 08 09 10 07 07 08 08 09 09 10 10 11 Recap & outlook Jan- Sep- Jan- Sep- Jan- Sep- Jan- Sep- Jan- May- JetMay- Kerosene May- Brent May- Not much concerns on rising fuel cost. We should not be Source: Company, DBS Vickers overly concerned on rising fuel cost having an impact on margins as THAI has put in place several initiatives as part of Thai Tiger JV. The company is setting up a joint venture low its business restructuring program in 2009. These have been cost airline called ‘Thai Tiger Airways (TTA)’ with Tiger successfully implemented and will enable THAI to continue to Airways (Singapore-based budget airline) with total registered mange fuel cost effectively. THAI has adjusted its fuel capital of Bt200m to serve regional and domestic routes. The hedging policy to be more consistent thus minimising risks of venture has been approved by the board of directors (BoD), volatile fuel prices. The company will now hedge at least 20% and is now pending approval from the Ministry of but not more than 80% of its average monthly fuel Transportation and Ministry of Finance (MOF). consumption (outside these ranges will require BoD’s approval) with length of contracts averaging 12-18 months. Board is dominated by THAI. The shareholding structure will comprise of 49.9% THAI, 39% Tiger, 10% Ryan Asia Limited, THAI: Jet fuel hedging and fuel surcharge coverage and 1.1% TTA’s Thai nationality employees. Board comprises % of consumption % of fuel surcharge coverage 4, 2, and 1 from THAI, Tiger Airways, and Ryan Air, respectively. It is expected to start operation by Jun11 with a 80 200 70 fleet of 4 A320 aircraft (180 seats) and will add another 4 60 150 aircraft in 2012. These 8 aircraft were originally ordered from 50 Tiger airways under lease contracts. 40 100 30 TTA: Shareholder structure 20 50 10 Ryan Air TTA Thai 0 0 % Employ ee . % 10 1 1 11 11 10 10 10 09 09 09 08 08 08 10 09 08 Jul Jul Jul Jan Jan Jan Jan Apr Oct Apr Oct Apr Oct FuelApr heding F uel Surcharge Cov erage (RHS) Source: Company, DBS Vickers Hedging policy in place. The current jet fuel price hedging collar is between US$90 and US$104/barrel (current jet fuel Tiger price: US$110). The percentage of fuel hedged to total THAI Airways % consumption is up to 41% for 1Q11F and 31% for 2Q11F; % 50 the company is likely to increase the hedging amount as it 39 moves along while monitoring the trend of fuel prices. For Source: Company, DBS Vickers fluctuations of fuel prices within this range, the company will use fuel surcharge to manage costs. At current levels, fuel Page 2 Company Focus Thai Airways Expanding routes. Thai Tiger Airways’ flights will be short aircraft retrofit program and new aircrafts acquisition) should haul with a maximum of five hours, focusing on existing also help. The management expects yield to improve by 4% routes with strong demand, and new routes that are more y-o-y to Bt2.2/km in FY11F from Bt2.12/km in FY10F. feasible for a low cost carrier to operate (compared to its current premium airline). The airline will also seek fifth THAI: Monthly passengers yield freedom rights from some countries for the right to fly THB/RPK between two foreign countries (rather than back to their . 2 45 own) for flights that originate or end in one’s own country. 2 35 . Capturing low cost demand. The venture will help THAI to 2 25 . expand its network, diversify into new a customer segment, 2 15 . and exploit the fast growing budget travel demand as well as 2 05 .
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