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 become one of the region’s most profitable low-cost airlines. Net profit gr (%) 152.6 180.0 30.7 17.9 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 This report is prepared by Thanachart Securities. Please contact our salesperson for authorisation. Please see the important notice on the back page. 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 any of their respective affiliates. TNS has no authority whatsoever to make any representation or warranty on behalf of the company or any other syndicate member or any of their respective affiliates in connection with any proposed offering or otherwise. This document is confidential and is being furnished to you solely for your information and may not be reproduced or redistributed to any other person or published, in whole or in part, for any purpose. 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The shares in the company have not been registered under the U.S. securities act and may not be offered or sold within the United States or to, or for the account or benefit of, U.S. persons, except pursuant to an exemption from, or in a transaction not subject to, the registration requirements of the U.S. Securities Act. Neither this document nor any copy of it may be taken or transmitted into Canada, or distributed or re-distributed in Canada or to any individual outside Canada who is a resident of Canada. Neither this document nor any copy of it may be taken or transmitted into Japan, or distributed or re-distributed in Canada or to any individual outside Japan who is a resident of Japan. This document does not constitute or form part of any offer for sale or solicitation of any offer to buy any securities nor shall it or any part of it form the basis of or be relied on in connection with any contract or commitment whatsoever. Any decision to purchase shares in any offering should be made solely on the basis of the information to be contained in the final offering memorandum to be published in due course in relation to the offering. 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.