Thanachart Ad Hoc Research Thanachart Ad Hoc Research 23 MAY 2013
Initial Public Offering (IPO)
Nok Airlines Pcl (NOK TB)
Differentiation pays off
Despite being less cost competitive, Nok Airlines has found ways to differentiate itself and become one of the region’s most profitable low- cost airlines. Its price premium strategy has helped it avoid making losses since 2009 despite many crises and we forecast earnings growth SAKSID PHADTHANANARAK of 180% and 30.7% in 2013-14. Our DCF fair value is Bt21.2bn-26.9bn. 662 – 617 4900
[email protected] What is Nok Airlines?
Nok Airlines, Thai Airways’ associate firm, dominates Thailand’s domestic COMPANY VALUATION market with the second-highest market share of 41%. Based at Don Mueang and Chiang Mai airports, its major rival is Thai AirAsia. To differentiate itself, Y/E Dec (Bt m) 2012A 2013F 2014F 2015F Nok Airlines focuses on the domestic market to serve more destinations and Sales 8,218 13,058 17,510 21,338 have greater flight frequency. Covering the less competitive routes, offering Net profit 505 1,413 1,846 2,176 more services for less price-sensitive passengers and Thailand’s growing domestic market, Nok Airlines can command a price premium and has Norm profit 505 1,413 1,846 2,176 Net profit gr (%) 152.6 180.0 30.7 17.9 become one of the region’s most profitable low-cost airlines. Norm profit gr (%) 152.6 180.0 30.7 17.9
One of the most profitable low-cost airlines ROE (%) 59.9 41.3 28.6 28.8 Despite it being less cost competitive, Nok Airlines’ price premium strategy Net D/E (%) na (89.4) (85.4) (84.0) allows it to enjoy the highest operating profit per available seat kilometer (ASK) of Bt1.17 versus the regional low-cost peer average of Bt0.66. We COMPANY INFORMATION believe the reasons Nok Airlines can command higher fares despite flying Trading date 20 June 2013 short distances are: 1) the less competitive domestic market, 2) its first- IPO price (Bt) na mover advantage in some provincial airports that limit the number of airlines, IPO shares (m shares) 187.50 3) its better time slots and greater flight frequency on some routes, and 4) it offers some ancillary items, such as 15kg of check-in baggage and a fixed Listed shares (m shares) 625.00 seat and snack, free of charge. However, we expect its operating profit per Par value (Bt/share) 1.00 ASK to come down due to its plan to fly international flights. Free float (%) na
Sector Transportation 180% and 30.7% earnings growth in 2013-14F Major shareholder Thai Airways 39.2% We forecast Nok Airlines’ normalized earnings to grow 180% y-y in 2013 and Sources: Bloomberg, Company data, Thanachart estimates
30.7% y-y in 2014 driven by: 1) a low 2012 earnings base due to Thailand’s floods and aircraft redelivery expenses, 2) ASK rising by 64.6% in 2013F Disclaimer : from fleet replacement to increase the number of seats and aircraft Thanachart Securities and/or one or more of utilization, and by 40% in 2014F from the delivery of seven more aircraft, and its affiliates is or may be acting as an 3) lower jet fuel price assumptions of US$122/bbl in 2013F and US$118/bbl co-underwriter in an offering of securities of the company. Investors should read the prospectus in 2014F from US$127/bbl in 2012. This is despite our assumptions that its in detail before making a decision to invest in the cabin factor falls to 82-83% in 2013-14F from 84% in 2012 and passenger shares of Nok Airlines Pcl. No part of this yield drops to Bt3.0-3.1/km/pax in 2013-14F from Bt3.2 in 2012 on a forecast material may be (i) copied, photocopied or rise in ASK and concerns over its planned launch of international flights. duplicated in any form by any means or (ii) redistributed or passed on, directly or indirectly, Bt21.2bn-26.9bn equity value to any other person in whole or in part, for any purpose without the prior written consent of We see Nok Airlines’ current net cash position as mainly being a result of it Thanachart Securities. leasing all its aircraft. We assume Nok Airlines financially leases eight
ATR72-500s and operationally leases 22 B737-800s in the next three years. PLEASE NOTE THAT THE BLACKOUT However, a planned capital increase and forecast EBITDA growth of 189% PERIOD WILL BE 28 MAY – 14 JUNE 2013 this year and 35% next should keep the carrier in a net cash position. We
use discounted cash flow (DCF) methodology using a WACC of 12.0-14.0% to derive Nok Airlines’ fair value. Assuming 2% terminal growth for Nok Airlines, we arrive at an equity value of Bt21.2bn-26.9bn
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23 MAY 2013 Thanachart Ad Hoc Research
Disclaimer (Public Offering)
This document has been prepared by Thanachart Securities (“TNS”) independently of Nok Airlines Public Company Limited, any other syndicate member or any of their respective affiliates.
The information and opinions in this document are entirely those of TNS as part of its internal research activity and not as a manager or underwriter of any offering or as an agent of or financial advisor to the company or any other syndicate member or
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company or any other syndicate member or any of their respective affiliates in connection with any proposed offering or otherwise.
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The information contained in this document is subject to change without notice, its accuracy is not guaranteed and it may not contain all material information concerning the company. Accordingly, no representation or warranty, express or implied, is made as to, and no reliance should be placed on, the fairness, accuracy, completeness or correctness of the information,
projections and opinions contained in this document. None of the company, any syndicate member or any of their respective
affiliates or directors, members, officers or employees shall have any liability whatsoever (in negligence or otherwise) for any loss howsoever arising from any use of this document or its contents or otherwise arising in connection with this document. None of the company, any syndicate member or any of their respective affiliates or directors, members, officers or employees may from time to time purchase, subscribe for, add to or dispose of any securities of the company (or may have done so before publication of this report) or make a market or act as principal in any transactions in such securities.
In addition, research reports distributed in Thailand should contain the following legends:
TNS is acting as or has been acting as the co-underwriter for the offering of the shares of Nok Airlines Public Company Limited.
Investors should read the prospectus in detail before making a decision to invest in the shares of Nok Airlines Public Company
Limited.
Investors may refer to a report on the results of sale of securities to the public which Nok Airlines Public Company Limited has submitted to the office of the Thai securities and exchange commission for information with respect to the size of the offering, the offering price, the allocation of shares to directors, management, other parties related to the company and among syndicate members, and other information.
Investors should read the prospectus in detail before making a decision to invest in the shares of Nok Airlines Public Company limited.
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23 MAY 2013 Thanachart Ad Hoc Research
The largest domestic route coverage carrier
What is Nok Airlines?
Given the government’s policy to liberalize the aviation industry, Thailand’s rules and Nok Airlines was set up in regulations which used to protect the domestic aviation market for the national carrier 2004 to capture the high- have been partly deregulated. This allowed low-cost carriers to emerge in Thailand growth low-cost airline from 2003. To capture the fast-growing low-cost airline market, Thai Airways (THAI, market in Asia TB, TP Bt23.00, SELL), along with other Thai companies set up a low-cost airline, called Sky Asia, in 2004 before they changed the name to Nok Airlines in 2006.
After Nok Airlines operated successfully in Thailand’s domestic market, It began its first international services in 2007 with daily flights to Bangalore, India and Hanoi,
Vietnam. However, it suspended international operations in 2008 and it has decided
to focus on domestic services in Thailand. The carrier now dominates Thailand’s domestic market with the second-highest share of 41% among its low-cost peers and the most extensive domestic route coverage.
It covers 23 domestic destinations with 4.16m passengers in 2012 and 1.43m in Currently, it only covers 1Q13. The company operates 17 aircraft with 10 Boeing 737-800s, three Boeing 737- domestic routes with a 41% 400s, two ATR 72-200s and two ATR 72-500s from two hubs in Thailand – Don domestic market share and Mueang and Chiang Mai airports. The average fleet age is at 11.7 years. However, it 17 aircraft plans to replace all of the Boeing 737-400s and ATR 72-200s with younger Boeing
737-800s and ATR 72-500s by end 2013. This will bring down the average fleet age
to seven to eight years. Moreover, Nok Airlines charters SAAB 340s from Siam General Aviation Co. Ltd. based on actual flight usage to operate on routes with low passenger numbers.
Nok Airlines’ passenger revenues accounted for 93.9% of total revenues in 1Q13 while service income (or ancillary income) made up 5.5%.
Ex 1: Destination Coverage As Of 31 March 2013 Ex 2: Current Fleet As Of 31 March 2013
Model Boeing 737-800/400 Fleet (aircraft) 13 Capacity (seats) 150-189
Model ATR 72-200/500 Fleet (aircraft) 4 Capacity (seats) 66-70
Model SAAB 340B* Fleet (aircraft) 5 Capacity (seats) 34
Source: Company data Source: Company data Note: * SAABs are operated by Siam General Aviation under the “Nok Mini” brand
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Ex 3: Revenue Structure In 2012 Ex 4: Cost Structure In 2012
Staff costs Fuel costs
Other 6% 37% revenues Aircraft 0.5% Passenger rental revenues 11% Ancillary 94.7% income 4.8% Repair & maintenance
18% Others
28%
Source: Company data Source: Company data
After listing Nok Airlines on the Stock Exchange of Thailand (SET), THAI plans to After the listing, THAI plans remain as a major shareholder with a 39.2% stake. However, Nok Airlines’
to hold a 39% stake in Nok management confirms that the company plans to maintain its independence under the Airlines shareholder agreement. Besides no management members from THAI, THAI would only have a maximum five out of the total of 12 board seats based on its 39.2% stake.
Nok Airlines plans to use the proceeds from the IPO for working capital to expand its business and boost its aircraft numbers.
Ex 5: Shareholding Structure – Pre-IPO Ex 6: Shareholding Structure – Post-IPO Asvinvichit IPO King Pow er Asvinvichit 5% 30% 5% 4% SCB King Pow er 5% 5%
CPB Equity Thai SCB 6% Airways 4% K.Patee 49% CPB Equity
5% 5% K.Patee
4% Thai Aviation Aviation Investment Inv es tment Airw ays 25% 10% 39%
Source: Company data Source: Company data
Nok Airlines versus Thai AirAsia
Despite being less cost competitive than its major rival, Thai AirAsia (AAV TB, Bt6.30, Nok Airlines differentiates HOLD), Nok Airlines has found several ways to differentiate itself and maintain its
itself by … profitability and growth. Please note that we are not trying to argue whose strategy is
better as we believe both strategies have their own strengths. First, while Thai AirAsia operates both in the domestic and international markets, Nok
… 1) focusing on the Airlines focuses only on Thailand’s domestic routes. Even though the Asian market is domestic routes that are less much larger, Thailand’s domestic market is less competitive with some provincial competitive … airports limiting the number of airlines.
Secondly, while Thai AirAsia enjoys cost competitiveness allowing it to offer low air …2) targeting less price- ticket prices and gain more passenger volume, Nok Airlines targets less price- sensitive passengers … sensitive customers meaning it can demand higher air ticket prices and gain better passenger yield figures.
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Ex 7: Revenue Per Available Seat Kilometer (RASK)
(Bt/seat/km.)
3.0 2.77 2.82 2.69
2.5
Malaysia Thailand 2.01
2.0 1.84 1.76 1.63
1.5
1.0 2010 2011 2012 2012 2012 2012 2012
Sources: Company data, Cebu Pacific, AirAsia Malaysia, AirAsia Thailand, Tiger Airways Note: Exchange rate: SGD25/Bt, PHP10/Bt, MYR0.75/Bt
Ex 8: Cost Per Available Seat Kilometer (CASK-Ex Fuel)
(Bt/seat/km.) 2.0
1.7 1.60 1.64 1.58
1.4
Thailand 1.1 0.97 0.94 0.94 Malaysia
0.8 0.67
0.5 2010 2011 2012 2012 2012 2012 2012
Sources: Company data, Cebu Pacific, AirAsia Malaysia, AirAsia Thailand, Tiger Airways Note: Exchange rate: SGD25/Bt, Php10/Bt, Rm0.75/Bt
Thirdly, by gaining larger passenger volumes, Thai AirAsia hopes to sell more … 3) offering free-of-charge ancillary items such as check-in baggage, fixed seats and in-flight meals to improve ancillary items … its profitability. Nok Airlines, in contrast, offers free-of-charge ancillary items in return for its higher air ticket prices.
Fourthly, as they use the same engines, we see no major difference between Thai … 4) using a mixed-fleet AirAsia’s A320-200s and Nok Airlines’ Boeing 737-800s. However, Thai AirAsia uses strategy to match the a single aircraft type in order to have only one type of cabin crew and mechanics to number of passengers … operate its entire fleet, allowing it to reduce crew and maintenance costs.
In contrast, despite higher costs, Nok Airlines uses a mixed-fleet strategy with Boeing 737-800s (189 seats) and ATR72s (70 seats) to match passenger numbers. Thus, Nok Airlines can operate flights to provincial airports which have small numbers of passengers. In return, it can command a price premium on these less competitive
routes.
Finally, Thai AirAsia has both operating and financial leases for aircraft in its fleet to … 5) expanding its fleet via obtain better returns while most of Nok Airlines’ aircraft are operationally leased for
mostly operating leases for flexibility of replacement. flexibility in replacement
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Growing domestic aviation market Even though Nok Airlines focuses only on Thailand’s domestic market, we are not Domestic passengers grew concerned about its growth outlook. In the past eight years, Airports of Thailand (AOT by 6.6% a year over the past TB, Bt150.00, BUY) reported a domestic passenger CAGR of 6.6% a year while eight years growth was at 16.6% in 1HFY13 (October 2012 – March 2013).
Ex 9: AOT’s Domestic Passengers Ex 10: AOT’s Domestic Aircraft Movements
('000 passengers) (Flights)
30,000 250,000
25,000 200,000 20,000 150,000 15,000 100,000 10,000
5,000 50,000
0 0
FY2005 FY2006 FY2007 FY2008 FY2009 FY2010 FY2011 FY2012 FY2005 FY2006 FY2007 FY2008 FY2009 FY2010 FY2011 FY2012 7MFY12 7MFY13 7MFY12 7MFY13
Source: Airports of Thailand Source: Airports of Thailand
We expect strong domestic We also expect domestic air travel demand to continue its strong growth trajectory
pax. growth due to … over the next few years due to the following reasons:
First, Thailand’s attractions are a major factor enticing foreign tourists to travel around the country. With various popular tourist destinations, warm weather, a reputation for …1) Thailand being a major hospitality, relatively low costs, better travel infrastructure and accommodation than tourist destination … some of its neighbors, Thailand is a key tourist destination. Not only did the number of
Asian passengers traveling to Thailand grow by 17.3% y-y in 2012 but passengers
from Europe and the US also rose by 11.6% and 10.5% despite the European debt crisis and the sluggish economy in the US.
Ex 11: Thailand’s Passengers By Region (m pax) 2010 2011 2012 1Q13 1Q12 y-y %
Asia 9.2 11.5 13.5 3.9 3.0 29.7 - ASEAN 4.5 5.6 6.0 1.5 1.4 6.3
- North Asia 3.6 4.8 6.2 2.1 1.4 56.3 - South Asia 1.0 1.2 1.3 0.3 0.3 15.7
Oceania 0.8 1.0 1.0 0.3 0.2 4.0 Europe 4.4 5.0 5.6 2.1 1.9 10.4
Americas 0.8 1.0 1.1 0.3 0.3 8.0
- US 0.6 0.7 0.8 0.2 0.2 7.3
Middle East 0.6 0.6 0.6 0.1 0.1 (1.6)
Africa 0.1 0.1 0.2 0.0 0.0 5.4 Total 15.9 19.2 22.0 6.8 5.7 19.9
Source: Department of Tourism
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Moreover, Thailand’s tourism industry has continued to show its resilience to many
crises. These have included the SARS and bird flu epidemics, the Indian Ocean tsunami, the coup, the US economic meltdown, the occupation by anti-government protesters of the capital’s airports, multiple rounds of deadly street fighting, the ongoing European debt crisis, the tsunami disaster in Japan and severe floods in Bangkok. Despite these negative factors, passenger movements through AOT’s
airports still grew by 7.3% a year on average during January 2004 to March 2013.
Ex 12: Thailand’s Tourism Continues To Show Its Resilience To Many Crises
(y-y %) Passenger numbers (RHS) Passenger grow th (LHS) (m passengers)
90 Thai 25 Bird flu Lehman Yellow shirts' Bombing at Coup US Songkran flood filed for second rally Hadyai Airport subprime riots 20 70 bankruptcy
15 50
10 30 7.3% CAGR during 2003-12 5 10 0 (10) Tsunami Sondhi's first Bangkok Red shirts' Airport Violence Curfew Tsunami (5) rally bombings first rally closure in BKK in BKK in Japan (30) (10) 1Q04 3Q04 1Q05 3Q05 1Q06 3Q06 1Q07 3Q07 1Q08 3Q08 1Q09 3Q09 1Q10 3Q10 1Q11 3Q11 1Q12 3Q12 1Q13
Sources: Airports of Thailand, Thanachart Compilation
Secondly, the development of the aviation industry in Thailand has also stimulated air travel demand. The emergence of low-cost airlines in Thailand since 2003 has led to …2) the change in a substantial decrease in fares, allowing middle-income people to fly more often. passengers’ behavior to Moreover, airlines themselves have also developed their route networks and are travel by air instead of buses offering more flight frequencies and destinations. With faster, more comfortable and and trains … affordable air travel choices, we have seen a continued surge in air passenger
numbers and a fall in passengers traveling by trains and buses.
Ex 13: AOT’s Low-cost Airline Passengers Ex 14: Bus And Train Passengers in Thailand
('000 passengers) (m passengers)Bus (LHS) (m passengers)
25,000 13 Train (RHS) 52
20,000 12 50
11 48 15,000 10,000 10 46
5,000 9 44 8 42 0 7 40
FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 7MFY13 2004 2005 2006 2007 2008 2009 2010 2011 Source: Airports of Thailand Source: Ministry of Transport
Note: Bus passengers FY ending September
Train passengers FY ending December
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Finally, we expect the growing urbanization of Thailand to act as another driver for
… 3) the growing urbanization domestic air travel demand. During 2009-11, passenger numbers through provincial of Thailand airports in Thailand grew by 7.1% a year. Besides tourism growth, we believe this was a result of strong economic and rural income growth making it more affordable for local people to fly more often.
Ex 15: Pax Growth In Thailand’s Regional Airports
Airport CAGR during 2009-11 (%) Airport CAGR during 2009-11 (%) Khon Kaen (1.8) Sakon Nakhon 62.7
Krabi 0.3 Trang 13.6 Phitsanulok 3.5 Hua Hin (46.8)
Ubon Ratchathani 9.9 Lampang 40.6
Udon Thani 3.0 Chumphon 0.0 Surat Thani 7.6 Ranong 85.9
Nakhon Ratchasima (55.7) Loei 286.7 Phetchabun 0.0 Phrae 262.2
Nakhon Phanom 92.5 Mae Sot 234.9 Mae Hong Son (13.1) Nan 107.4
Buri Ram (44.1) Pai (46.9) Narathiwat (12.6) Trat (20.2)
Nakhon Si Thammarat 14.7 Sukhothai (3.0)
Roi Et 543.7 CAGR during 2009-11 7.1 Sources: Department of Civil Aviation, Bangkok Airways
Ex 16: Thailand’s Rural Income
Regional (Bt) 2009 2010 2011 CAGR (%) Northeastern 41,237 45,755 48,549 8.5%
Northern 62,372 68,321 72,925 8.1% Southern 93,400 112,661 125,270 15.8%
Eastern 377,317 431,982 436,479 7.6%
Western 101,216 105,257 108,727 3.6% Central 200,292 217,469 204,166 1.0%
Bangkok & vicinity 377,183 410,203 422,141 5.8% Whole Kingdom 143,353 159,105 164,512 7.1%
Source: Office of the National Economic and Social Development Board
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One of the most profitable low-cost airlines
Price premium strategy
Although Nok Airlines is not the lowest cost of the low-cost airlines, we are impressed Despite being less cost with its strategy to command a price premium and become one of the most profitable competitive, Nok Airlines airlines in the region. Even though its cost (excluding fuel expenses) of available seat can command a price kilometers (CASK) was at Bt1.64 in 2012, its revenue per available seat kilometer premium because … (RASK) was also high at Bt2.82 during the same period. This allowed its operating profit per ASK to maintain top position versus its regional peers.
Ex 17: Operating Profit (Ex-fuel) Per Available Seat Kilometer
(Bt/seat/km.)
1.3 1.17 1.17 1.2 Malaysia 1.11 1.09 1.1 1.07
1.0 Thailand 0.90 Average = 0.9 0.9
0.8 0.66 0.7 0.6
0.5 2010 2011 2012 2012 2012 2012 2012
Sources: Company data, Cebu Pacific, AirAsia Malaysia, AirAsia Thailand, Tiger Airways Note: Exchange rate: SGD25/Bt, PHP10/Bt, MYR0.75/Bt
In other words, Nok Airlines’ high operating profit per ASK means it can command high air ticket prices despite flying short distances. We believe this is due to the
following reasons:
First, Thailand’s domestic market is less competitive compared with the regional …1) Nok Airlines focuses on market as the country still has a barrier to entry for foreign airlines. Thailand’s Air the less competitive Navigation Act A.E. 2497 requires majority Thai ownership to operate domestic flights domestic market … in Thailand. Thus, there are only six players in the domestic market: Nok Airlines, Thai AirAsia, THAI, Thai Smile, Bangkok Airways and Orient Thai. In 2012, Thai Airways
including Thai Smile had a domestic market share of 35% while Thai AirAsia and Nok Airlines had 26.6% and 23.7% shares respectively. However, THAI, Thai Smile and Bangkok Airways are classified as full-service airlines with target customers different from those of low-cost airlines. Thus, in the domestic low-cost airline market, we can say that Nok Airlines’ major competitors are only Thai AirAsia and Orient Thai.
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Ex 18: Domestic Market Share By No. Of Passengers In Thailand
(%) THAI Nok A ir Air Asia Others
100
16.7 17.1 14.8 90 80 70 24.6 24.7 26.6 60
50 17.5 21.2 23.7 40 30 20 41.3 37.0 34.9 10 0
2010 2011 2012
Source: Department of Civil Aviation
…2) it enjoys the first-mover Secondly, besides the majority Thai ownership rule, airports themselves still limit the
advantage in some number of airlines based on their passenger capacity. Airports with less than 50,000
provincial airports which passengers a year can have only two airlines in service while airports with 50,000- 300,000 passengers a year can have three airlines and airports with more than limit the number of airlines 300,000 passengers a year can have an unlimited number of airlines. Thus, Nok
Airlines has the first-mover advantage in commanding a price premium on these less competitive routes.
Ex 19: Nok Air’s Highest Domestic Route Coverage Ex 20: Nok Air’s Greatest Flight Frequency
(No. of routes) Pr imar y r oute Secondary route (Round trips/w eek) Primary route Secondary route
25 600 Feeder route Feeder route 20 500
12 400 140 15 14 77 28 2 300 14 10 3 2 200 266 291 308 5 9 10 1 100 196 8 28 4 0 2 0 NOK Air Asia THAI Bangkok Orient NOK Air Asia THAI Bangkok Orient Airways Thai Airw ays Thai
Source: Department of Civil Aviation Source: Department of Civil Aviation
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Ex 21: Airports’ Limitations On Number Of Airlines Ex 22: Nok Airlines’ Destination Coverage
(No. of passengers/year) Nan Buri Ram > 300,000 Phitsanulok Phr ae Mae Sot 50,000-300,000 Unlim ite d Roi Et Loei no. of airlines < 50,000 Sakon Nakhon Nakhon Phanom Only 3 airlines Nakhon Si Ubon Ratchathani Only 2 airlines Udon Thani
Surat Thani
Feeder route Secondary route Primary route Hat Y ai Trang Chiang Rai Chiang Mai Phuket Krabi Khonkhaen Narathiw at Lumpang Samui Mae Sot Mae Hong Son Udon Thani Hat Y ai (%) 0 20 40 60 80 100
Sources: Company data, Department of Civil Aviation Sources: Company data, Department of Civil Aviation Note: 1/Operated by Siam General Aviation under “Nok Mini” brand
Finally, it offers more services in return for higher ticket prices, such as 15kg free-of- …3) it offers free-of-charge charge check-in baggage, a fixed seat and water and a snack. The company also ancillary items in return for says that it has the most choices of booking channels and payment options. higher fares
Ex 23: Ancillary Items Free Of Charge Ex 24: Various Booking & Payment Channels
Source: Company data Source: Company data
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Flying international routes is a concern To keep growing over the longer term and reduce the risk from more intense Given that it’s less cost competition in the domestic market, Nok Airlines plans to fly international routes. This competitive, we are worried would also allow it to better utilize aircraft as long-haul routes would keep aircraft in about Nok Airlines’ plan to the air for longer periods of time. For example, in 2012, THAI’s aircraft utilization was fly overseas at 11.5 block hours per day as it had intercontinental flights while Thai AirAsia’s aircraft utilization was also at 11.5 block hours with four-hour flights on both international and domestic routes but Nok Airlines’ utilization was at only eight to nine block hours as it operates only domestic flights.
Using the same low-cost airline model, Nok Airlines’ plan is to have flights overseas of four hours and below as this would use its fleet more efficiently and consistently while
passengers would still enjoy the flights despite limited seating space. Pilots and cabin
crew also would not need to spend the night in foreign countries, saving the carrier overtime and accommodation expenses.
In fact, Nok Airlines plans to launch flights from Thai provincial airports to cities in
Myanmar starting this September. The first route would be between Mae Sot, a city in Thailand’s northwest, to Mawlamyine in Myanmar. Then there would be flights from Mae Sot to Yangon and from Don Mueang to Yangon in 4Q13.
However, flying overseas is our major concern for Nok Airlines as we expect However, our concern is competition to intensify while Nok Airlines is less cost competitive. However, our partly eased due to … worries are partly eased by the following factors.
First, we believe Nok Airlines is on the way to reducing its operating costs. The plan …1) aircraft replacement plan is to replace all of its old Boeing 737-400s and ATR 72-200s with new Boeing 737- to reduce operating costs … 800s and ATR 72-500s by the end of 2013. The company expect the new Boeing 737-800s with 189 seats (versus Boeing 737-400s with 160 seats) to increase its aircraft utilization from seven to 10 hours a day, consume 12.8% less fuel volume per
seat and lower its maintenance costs.
Ex 25: Benefits From Aircraft Replacement
Boeing 737-400 (Old fleet) Seats increase from 160 to 189
Aircraft utilization increases from 7 to 10 hours
Boeing 737-800 (New fleet) 12.8% lower fuel consumption per seat
Lower maintenance costs
Source: Company data
Secondly, the management is aware of the risks of flying abroad as this failed …2) management’s previously when the airline flew to Bangalore and Hanoi in 2008. This time, we expect awareness of the risks… them to move very cautiously and the targets will be those routes with less competition in Southeast Asia.
Thirdly, in fact, Nok Airlines currently operates charter flights to China and it has been …3) the plan has been studying routes to some other countries for quite some time. studied for some time
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180% earnings growth in 2013F and 30.7% in 2014F We forecast Nok Airlines’ normalized earnings to grow by 180% y-y in 2013 and We forecast Nok Airlines’ 30.7% y-y in 2014 based on the following assumptions. Please also note that one of earnings to grow 180% and the reasons for the strong anticipated earnings growth in 2013 is because of the low 30.7% in 2013-14 based on … earnings base in 2012 as a result of the impact of Thailand’s severe floods in 1Q12 and aircraft redelivery expenses of Bt247m.
First, we expect its cabin factor to stay high at 83% this year because of Thailand’s …1) cabin factor of 81-82% ... strong tourism industry. In 1Q13, its cabin factor was at 87%. However, we assume cabin factor falls to 82% in 2014 as a result of its aggressive capacity expansion.
Secondly, we factor in Nok Airlines’ capacity (ASK) increasing by 64.6% in 2013 and …2) ASK growth of 40-65% ... 40% in 2014 given its plan to increase: 1) its number of seats by 22% in 2013 and 28% in 2014, 2) its aircraft utilization from seven to 10 hours a day, and 3) having seven more aircraft in 2014.
Thirdly, given the concern about more intense competition in the domestic market …3) passenger yield of Bt3- and its plan to fly international routes, we forecast Nok Airlines’ passenger yields to 3.1/pax./km … fall to Bt3.1/passenger/kilometer in 2013 and Bt3.0 in 2014 from Bt3.2 in 2012.
Fourthly, we assume its ancillary income rises to Bt105 per passenger in 2013-14F …4) ancillary income of compared to Bt96 in 2012. Bt100 per passenger … Fifthly, we assume average jet fuel prices of US$122/bbl in 2013F and US$118 in …5) jet fuel price of US$118- 2014F. So far this year, the average jet fuel price has been US$123/bbl. Nok Airlines’
122/bbl fuel hedging policy is at 20-50% of its total fuel usage a month over the next six months to match its forward sales. We estimate that a drop in the jet fuel price by
US$1/bbl would increase Nok Airlines’ earnings by around 2% and vice versa.
As a result, we forecast Nok Airlines’ normalized earnings at Bt1.4bn in 2013 and Bt1.8bn in 2014.
Ex 26: Key Assumptions
2012 2013F 2014F Cabin factor (%) 84.2 83.0 82.0
Passenger yield (Bt/passenger/kilometer) 3.18 3.10 3.00 Ancillary income per passenger (Bt/passenger) 96.17 105.00 105.00
Jet fuel price (US$/bbl) 127 122 118 Exchange rate (Bt/US$) 31.1 29.4 30.0
Total passengers carried (passengers) 4.1 6.7 9.3 Sources: Company data, Thanachart estimates
In a net cash position
We believe Nok Airlines’ current net cash position is mainly a result of it leasing all its
aircraft. We assume Nok Airlines financially leases eight ATR72-500s and operationally leases 22 B737-800s over the next three years. However, a planned capital increase and expected EBITDA growth of 189% this year and 35% next would keep the carrier in a net cash position on our estimates. Nok Airlines has a dividend policy with a payout ratio of at least 25% of its net profit but we assume it pays 50%.
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Ex 27: Nok Airlines’ Fleet Ex 28: EBITDA vs Net Debt
(Fleet) B737-400 B737-800 ATR (Bt m) EBITDA (LHS) (x)
35 2,500 Net D/E (RHS) 0.1 30 30 2,000 0.0 25 23 8 (0.1) 5 1,500 20 15 17 16 14 (0.2) 15 42 2 1,000 8 3 3 10 22 (0.3) 18 2 8 10 14 500 5 10 (0.4) 6 33 0 0 (0.5)
2010 2011 2012 1Q13 2013 2014 2015 2010 2011 2012 2013F 2014F 2015F
Source: Company data Sources: Company data, Thanachart estimates
Bt21.2bn-26.9bn equity value
We apply discounted cash flow (DCF) methodology using a WACC of 12.0-14.0% to Based on DCF methodology, derive Nok Airlines’ fair value. Assuming a 2% terminal growth rate for Nok Airlines, we derive a fair equity value we arrive at an equity value of Bt21.2bn-26.9bn. of Bt21.2bn-26.9bn
Ex 29: Equity Value Sensitivity
WACC (%) Nok Airlines’ fair value (Bt m) 12.0 26,947
13.0 23,897 14.0 21,185
Source: Thanachart estimates
Besides PE multiples, we also use EV/EBITDAR to compare valuations with Nok
Airlines’ peers. EV/EBITDAR is earnings before interest, taxes, depreciation,
amortization, and restructuring or rent costs. We believe this multiple gives a better indication of Nok Airlines' financial performance as it eliminates the difference in airlines’ operating structures such as owned or leased aircraft and each country’s tax rates. The multiple is derived from dividing adjusted EV (EV + capitalized operating lease) by EBITDAR (EBITDA + aircraft rental expenses).
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Ex 30: Valuation Comparison
EPS growth —— PE —— —Div. yield— — ROE — EV/EBITDAR Company Code Country 13F 14F 13F 14F 13F 14F 13F 14F 13F 14F (%) (%) (x) (x) (%) (%) (%) (%) (x) (x)
Virgin Australia Holdings VAH AU Australia (28.0) 39.3 23.6 11.5 0.5 1.9 4.2 7.7 6.6 5.8 Ryanair Holdings PLC RYA ID Ireland 17.0 12.5 17.5 15.6 1.7 0.9 16.4 17.0 9.2 8.5
AirAsia BHD AIRA MK Malaysia 0.3 8.2 10.2 9.4 1.8 2.0 15.2 14.9 8.0 7.3 Norwegian Air Shuttle AS NAS NO Norway na 22.5 11.0 9.0 0.0 0.0 30.7 27.9 6.7 5.9
Cebu Air Inc CEB PM Philippines 33.7 23.7 14.3 11.6 1.3 0.6 14.5 16.7 8.2 7.3
Air Arabia PJSC AIRARABI UH UAE 14.3 18.8 11.7 9.8 5.5 6.3 8.1 9.5 8.4 6.9
EasyJet PLC EZJ LN UK 39.8 10.4 15.5 14.1 2.0 2.2 17.4 16.8 8.0 7.4
Asia Aviation AAV TB* Thailand 41.0 21.0 22.6 18.7 0.0 1.1 7.2 8.1 13.4 11.6
Average 16.9 19.5 15.8 12.4 1.6 1.9 14.2 14.8 8.6 7.6 Source: Bloomberg Note: * Thanachart estimates using normalized EPS growth
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COMPANY DESCRIPTION COMPANY RATING
Financial Nok Airlines was set up in 2004 by Thai Airways (THAI TB) Rating Scale management and other Thai companies when the Thai government adopted 5 Very Strong 5 4 a policy to liberalize the aviation industry and capture the 3 Risk Manage 2 Strong 4 growing low-cost airline market in Asia. After the listing, THAI manage ment 1 still plans to be the major shareholder with a 39% stake in the 0 ment Good 3
company. Nok Airlines currently focuses on the domestic Fair 2
*Corp. market with a share of 41%. It covers 23 domestic destinations Liquidity governance Weak 1 with 17 aircraft flying from two hubs in Thailand at Don Mueang and Chiang Mai airports. None 0
Source: Thanachart Source: Thanachart; *CG Awards, no rating
THANACHART’S SWOT ANALYSIS
S — Strength W — Weakness
It covers the most domestic destinations in Thailand Its lower cost-competitiveness makes it difficult to with the highest domestic market share. complete directly with rivals.
It enjoys first-mover advantage, thus commanding a Focusing only on the domestic market may limit the
price premium on less competitive routes. company’s long-term future growth. This also allows it to secure the best time slots to Most aircraft are operationally leased, resulting in high capture future demand. leasing expenses.
O — Opportunity T — Threat
Thailand is one of the top destinations for tourists. Highly volatile jet fuel prices pose a major risk.
It is also one of the fastest-growing low-cost airline Competition in the aviation industry is severe while
markets. demand for travel is also dependent on global economic
conditions. Having Thailand as its hub would allow it to cover parts
of China and India, the No.1 and No.2 countries by Other transportation methods such as high-speed
population. trains are being developed.
RISKS TO OUR INVESTMENT CASE
Fuel expenses account for almost 40% of Nok Airlines’ total costs. Therefore, fluctuations in jet fuel prices present a major risk to our earnings projections.
Political unrest and natural disasters in Thailand are another worry as the company depends a great deal on the domestic market.
Congestion at airports in Thailand could cause carriers to be less efficient and make expansion difficult.
Uncertainty over the Thai government’s airport policy in Bangkok represents a risk to the carrier’s operations.
Source: Thanachart
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FINANCIAL SUMMARY
INCOME STATEMENT FY ending Dec (Bt m) 2011A 2012A 2013F 2014F 2015F
Sales 6,039 8,218 13,058 17,510 21,338
Cost of sales 5,301 7,175 10,926 14,817 18,231 Gross profit 738 1,042 2,132 2,693 3,107 % gross margin 12.2% 12.7% 16.3% 15.4% 14.6% Selling & administration expenses 484 564 718 876 960
Operating profit 254 478 1,414 1,818 2,147
% operating margin 4.2% 5.8% 10.8% 10.4% 10.1% Depreciation & amortization 32 38 80 197 352 EBITDA 286 516 1,494 2,015 2,498 % EBITDA margin 4.7% 6.3% 11.4% 11.5% 11.7%
Non-operating income 38 42 43 86 97
Non-operating expenses 0 0 0 0 0 Interest expense 0 0 (0) (0) (0) Pre-tax profit 292 520 1,457 1,904 2,244 Income tax 9215445767 After-tax profit 200 505 1,413 1,846 2,176
% net margin 3.3% 6.1% 10.8% 10.5% 10.2% Shares in affiliates' Earnings 0 0 0 0 0 Minority interests 00000 Extraordinary items 0 0 0 0 0 NET PROFIT 200 505 1,413 1,846 2,176
Normalized profit 200 505 1,413 1,846 2,176 BALANCE SHEET
FY ending Dec (Bt m) 2011A 2012A 2013F 2014F 2015F ASSETS: Current assets: 1,857 2,098 7,429 8,310 9,398 Cash & cash equivalent 197 246 5,319 5,960 6,843 Account receivables 26 30 47 63 77
Inventories 5 4 6 8 10 Others 1,629 1,818 2,058 2,279 2,469 Investments & loans 4 5 5 5 5 Net fixed assets 71 81 500 1,304 1,952 Other assets 84 69 109 146 178
Total assets 2,016 2,252 8,044 9,765 11,533 LIABILITIES: Current liabilities: 1,145 1,273 1,996 2,685 3,283
Account payables 517 420 639 867 1,067 Bank overdraft & ST loans 0 0 0 0 0 Current LT debt 0 0 0 0 0 Others current liabilities 628 853 1,356 1,818 2,216 Total LT debt 0 0 0 0 0
Others LT liabilities 0 0 100 100 100
Total liabilities 1,218 1,364 2,096 2,785 3,383 Minority interest 00000 Preferreds shares 0 0 0 0 0 Paid-up capital 500 500 625 625 625
Share premium 0 0 3,875 3,875 3,875
Warrants 00000 Surplus 00000 Retained earnings 297 388 1,448 2,479 3,650 Shareholders' equity 797 888 5,948 6,979 8,150
Liabilities & equity 2,016 2,252 8,044 9,765 11,533
Sources: Company data, Thanachart estimates
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FINANCIAL SUMMARY
CASH FLOW STATEMENT FY ending Dec (Bt m) 2011A 2012A 2013F 2014F 2015F Earnings before tax 292 520 1,457 1,904 2,244 Tax paid (78) (42) (15) (67) (51)
Depreciation & amortization 32 38 80 197 352
Chg In working capital 326 (100) 200 210 184 Chg In other CA & CL / minorities (355) 423 234 250 192 Cash flow from operations 218 840 1,957 2,493 2,920
Capex (45) (48) (500) (1,000) (1,000) ST loans & investments (345) (360) 0 0 0 LT loans & investments (1) (1) 0 0 0
Adj for asset revaluation 0 0 0 0 0 Chg In other assets & liabilities 160 33 (32) (37) (32) Cash flow from investments (231) (376) (532) (1,037) (1,032) Debt financing 0 0 0 0 0 Capital increase 0 0 4,000 0 0
Dividends paid (100) (414) (353) (815) (1,006)
Warrants & other surplus (39) 0 0 0 0 Cash flow from financing (139) (414) 3,647 (815) (1,005)
Free cash flow 173 791 1,457 1,493 1,920
FINANCIAL RATIOS FY ending Dec 2011A 2012A 2013F 2014F 2015F Growth Rate Sales (%) 44.5 36.1 58.9 34.1 21.9
Net profit (%) (66.8) 152.6 180.0 30.7 17.9
Normalized profit (%) (66.8) 152.6 180.0 30.7 17.9 Dividend payout ratio (%) 0.0 0.0 50.0 50.0 50.0
Operating performance Gross margin (%) 12.2 12.7 16.3 15.4 14.6 Operating margin (%) 4.2 5.8 10.8 10.4 10.1 EBITDA margin (%) 4.7 6.3 11.4 11.5 11.7
Net margin (%) 3.3 6.1 10.8 10.5 10.2
D/E (incl. minor) (x) 0.0 0.0 0.0 0.0 0.0 Net D/E (incl. minor) (x) (0.2) (0.3) (0.9) (0.9) (0.8) Interest coverage - EBIT (x) na na na na na Interest coverage - EBITDA (x) na na na na na
ROA - using norm profit (%) 11.7 23.7 27.4 20.7 20.4
ROE - using norm profit (%) 26.0 59.9 41.3 28.6 28.8
DuPont
ROE - using after tax profit (%) 26.0 59.9 41.3 28.6 28.8 - asset turnover (x) 3.6 3.9 2.5 2.0 2.0 - operating margin (%) 4.8 6.3 11.2 10.9 10.5 - leverage (x) 2.2 2.5 1.5 1.4 1.4 - interest burden (%) 100.0 100.0 100.0 100.0 100.0
- tax burden (%) 68.4 97.1 97.0 97.0 97.0
Sources: Company data, Thanachart estimates
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DISCLAIMER Thanachart Ad Hoc Research
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DISCLAIMER Thanachart Ad Hoc Research
Recommendation Structure:
Recommendations are based on absolute upside or downside, which is the difference between the target price and the current market price. If the upside is 10% or more, the recommendation is BUY. If the downside is 10% or more, the recommendation is SELL. For stocks where the upside or downside is less than 10%, the recommendation is HOLD. Unless otherwise specified, these recommendations are set with a 12-month horizon. Thus, it is possible that future price volatility may cause a temporary mismatch between upside/downside for a stock based on the market price and the formal recommendation.
For sectors, we look at two areas, ie, the sector outlook and the sector weighting. For the sector outlook, an arrow pointing up, or the word “Positive”, is used when we see the industry trend improving. An arrow pointing down, or the word “Negative”, is used when we see the industry trend deteriorating. A double-tipped horizontal arrow, or the word “Unchanged”, is used when the industry trend does not look as if it will alter. The industry trend view is our top-down perspective on the industry rather than a bottom-up interpretation from the stocks we cover. An “Overweight” sector weighting is used when we have BUYs on majority of the stocks under our coverage by market cap. “Underweight” is used when we have SELLs on majority of the stocks we cover by market cap. “Neutral” is used when there are relatively equal weightings of BUYs and SELLs.
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THANACHART SECURITIES