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Thai Airways Thailand Company Focus Thai Airways Bloomberg: THAI TB | Reuters: THAI.BK DBS Group Research . Equity 1 Apr 2011 BUY Bt37.75 SET : 1047.48 Mitigating Japan impact Price Target : 12-month Bt 60.25 Reason for Report : Post non-deal roadshow note Positive response from investors at Europe NDR Potential Catalyst: Launching low cost airlines, exit from SOE status, and despite concerns over Japan impact and fuel prices drop in fuel price. Effective fuel hedging and timely surcharge Analyst adjustment to mitigate rising fuel prices; also Nalyne VIRIYASATHIEN +662 657 7823 implementing measures to offset lower Japan traffic [email protected] Continued strong growth momentum; maintain BUY for attractive valuation and 60% upside potential to Bt60.25 TP Price Relative With Japan contributing 11% Bt Relative Index Limited impact from Japan. 220 of passenger revenue, the recent turmoil in Japan affected . 55 80 THAI. But earnings should not be impacted substantially 45 . 80 170 because lower cabin factor on routes to Tokyo Narita and 35 . 80 120 Haneda (c. 50-60%) is being offset by robust cabin factor 25 . 80 70 (c.85%) on the remaining three Japanese routes to Fuguoka, 15 . 80 5 . 80 20 Nagoya and Osaka. These cities are further from the troubled 2007 2008 2009 2010 2011 Fukushima nuclear power plant. Meanwhile, THAI has Thai Airways ( LHS ) Relative SET INDEX ( RHS ) responded by cutting one flight/day to Tokyo Narita and increased frequency to Korea. Since the earthquake, THAI’s Forecasts and Valuation cabin factors on routes to China and Korea have edged FY Dec (Bt m) 2009A 2010A 2011F 2012F higher, implying the substitution effect. This should help to Revenue 161,603 180,589 198,351 209,339 EBITDA 31,758 32,226 38,875 43,131 partly offset the drop in Japan traffic. Pre-tax Profit 8,107 17,523 13,070 16,170 Net Profit 7,344 15,350 9,087 11,250 Cabin factor in 1Q11F is estimated at Net Pft (Pre Ex.) 4,705 5,136 9,087 11,250 Healthy 1Q11F traffic. EPS (Bt) 4.3 7.0 4.2 5.2 76.8%, below highs of 81% in 1Q10. But revenue should EPS Pre Ex. (Bt) 2.8 2.4 4.2 5.2 remain strong, premised on 2-3% yoy higher capacity (ASK) EPS Gth Pre Ex (%) (160) (15) 77 24 and passenger yield rising to Bt2.8/km vs Bt2.6/km in FY10. Diluted EPS (Bt) 4.3 7.0 4.2 5.2 However, we expect THAI to book Bt2.9bn forex loss in 1Q11F Net DPS (Bt) 0.3 1.2 1.1 1.3 because the Euro has appreciated 6% against the Thai baht. BV Per Share (Bt) 31.4 38.0 40.2 44.2 PE (X) 8.7 5.4 9.1 7.3 PE Pre Ex. (X) 13.6 16.0 9.1 7.3 Attractive valuation, reiterate BUY. We remain positive P/Cash Flow (X) 2.3 2.4 2.8 2.5 on THAI. Our target price remains Bt60.25 based on 1.5x EV/EBITDA (X) 6.4 5.9 4.8 4.7 FY11F P/BV (7-year average historical PBV +1SD), implying Net Div Yield (%) 0.7 3.3 2.9 3.4 P/Book Value (X) 1.2 1.0 0.9 0.9 hefty 60% upside potential. Its attractive growth potential Net Debt/Equity (X) 2.6 1.3 1.2 1.2 has been largely discounted, trading at 0.9x P/BV and 4.8x ROAE (%) 14.9 22.6 10.7 12.3 EV/EBITDA currently, below its historical mean and regional Earnings Rev (%): 0.0 0.0 0.0 peers’ averages of 1.2x and 6.6x (FY11F), respectively. Consensus EPS (Bt): - 4.8 5.7 Other Broker Recs: B: 14 S: 2 H: 3 At A Glance Issued Capital (m shrs) 2,183 ICB Industry : Consumer Services ICB Sector: Travel & Leisure Mkt. Cap (Btm/US$m) 82,400 / 2,718 Principal Business: THAI operates domestic, regional and Major Shareholders intercontinental flights to key destinations around the world and Ministry of Finance (%) 51.0 within Thailand. Vayupak Fund (%) 15.1 Corporate Governance Thai NVDR (%) 4.6 CG Rating (2010) Free Float (%) 32.0 Source of all data: Company, DBS Vickers, Bloomberg Avg. Daily Vol.(‘000) 7,768 “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: SGC / sa: CS Company Focus Thai Airways Positive response at Europe Non-Deal Roadshow Japan: Impact areas map Strong interest from investors in Europe. We had the pleasure of bringing Khun Raj Tanta-Nanta from Thai Airways International (THAI) on our non-deal roadshow (NDR) in Europe (Vienna, Frankfurt, Zurich, Edinburgh, and London). There was strong interest from investors and all the slots during the week long NDR were filled. Despite the unfortunate natural disaster in Japan, which full impact on Fukushima THAI is still being assessed, and continued concerns over daiichi nuclear rising fuel prices, sentiment towards the counter remained power plant epicenter positive. The management assured investors of its positive Sendai momentum going forward, given supportive industry fundamentals as well as continued improvements following the execution of its strategy. 250 km Nagoya Main questions. Questions centered on THAI’s fuel management policy, impact of Japan earthquake, launch of Thai-Tiger airline, cost cutting strategy, privatization plan, current operations, as well as strategies going forward. FAQ – Key questions from investors & management’s Source: DBS Vickers reply Q: Will Japan disaster have significant impact on 1Q11 and Q: What would be the impact of the recent Japan incident? full year 2011 earnings? A: THAI normally operates 59 flights per week to 5 Japanese A: Fortunately, THAI’s cabin factor to Japan has been robust cities - Tokyo Narita, Tokyo Haneda, Fuguoka, Nagoya, and at 85-90% YTD-Mar11, premised on the high tourist season Osaka – out of 287 domestic and 574 international flights per and improved travel demand. MTD-Mar11 cabin factor week. These Japanese routes are significant to THAI’s remained at 77%, hence, the average for Japan in 1Q11F earnings with 11% passenger revenue contribution and 9% should remain strong at above 80%. 2Q11F should feel a total revenue contribution in 2010. Hence, the turmoil in larger impact. Meanwhile, it is still premature to estimate full Japan is surely to have an impact on THAI. It has already seen year 2011 Japanese cabin factor, because it would depend on revenue drop by 5% over the last two weeks due to lower when the radiation fears will subside. For now, Japan travel travel demand since the earthquake and tsunami struck the demand remains soft and cabin factor could drop below Northeast coast of Japan. current levels if the concern persists. Q: What are passenger cabin factors on Japanese routes? Q: What is THAI’s plan to cushion the negative revenue impact from Japan? A: Average cabin factor to Japanese destinations is now at c.60% from 85-90% during the same period last year. Each A: THAI has cut 7 flights per week to Japan (Tokyo Narita) to route to Japan saw different impact - Tokyo Narita and 52 flights per week now, and shifted aircraft to Korea routes. Haneda, to where THAI operates 17 and 7 flights per week, It is likely to maintain this level for now, because despite respectively (41% of all Japanese routes), saw the largest softer demand, it remains acceptable (c. 60% cabin factor). In drop to 50-60% because of radiation fears. The damaged any case, the company is monitoring the situation closely. If Fukushima nuclear power plant is 250km from Tokyo. there is potentially further significant drop in travel demand Meanwhile, cabin factor for the remaining three Japanese to Japan, it would announce plans to mitigate the impact routes are holding at c.85%. April bookings for all Japanese (The management is discussing the matter, but no details routes averaged 55%. were disclosed). The plan could be to divert more aircraft Page 2 Company Focus Thai Airways from Japan routes and raise frequency for other regional THAI: Fuel hedging and surcharge trend route with strong travel demand (e.g. Singapore, Hong Kong, % of consumption % of fuel surcharge coverage Korea, China, etc.). 80 200 70 Q: Do you see a shift in travel demand from Japan to other 60 150 destinations? 50 40 100 A: The Japanese earthquake has reduced cabin factor to 30 Japan, but THAI’s cabin factor to China and Korea has edged 20 50 higher. The company thinks these routes could be substitute 10 0 0 destinations for travelers to Japan. The average cabin factor 10 11 11 09 10 10 08 09 09 08 08 10 09 on various routes to China and Korea rose to c.80% from 08 Jul Jul Jul Jan Jan Jan Jan Oct Apr Oct Apr Oct Apr c.70% before. This should help to partly offset the drop in FuelApr heding F uel Surcharge Cov erage cabin factor on Japanese routes. Source: Company, DBS Vickers Q: What is your fuel cost management plan? Q: Can you pass on higher fuel prices? A: Rising fuel prices is one of THAI’s major concerns, because A: Part of the higher fuel costs is being passed on by hiking fuel cost accounts for c.30% of its total operating expenses.
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