Airports of Thailand

Strong passenger growth prospects with scope for upside

Airports of Thailand Plc (AOT)

Investment thesis

The share price has increased by 9% over the past month, fueled by expectations of strong tourism high season-fueled earnings growth. We think that the good prospects for air traffic growth together with strong profit expansion of 32% this year (against 16percent for the broad SET) will make for further share price appreciation going forward. There would be scope for upside to our profit forecast, should passenger numbers rise faster than we assume (with the relocation of low-cost carriers to Don Mueang Airport) and/or increases to PSCs (subject to the approval of the Civil Aviation Commission).

AOT currently trades at a forward PEG of 0.57x, a deep discount to the regional average of 2.2x. We have, therefore, upgraded our rating to BUY from HOLD.

Expect strong 1Q13 earnings growth

We expect the firm to post a strong 1Q13 (Oct-Dec 2012) net profit of Bt3,303m, up by 163% YoY and 114% QoQ. Stripping out an assumed FX gain of Bt1,090m, core profit would be Bt2,213m, up by 70% YoY and 42% QoQ. The key driver of core earnings growth is a substantial rise in air traffic—passenger numbers increased by 29% YoY and 14% QoQ to 20.8m people and aircraft movement by 17% YoY and 9% QoQ to 133,751 flights.

Momentum to be sustained through 2Q13 (Jan-March)

Strong earnings growth momentum will continue through 2Q13, fueled by peak season for tourism. Historical data indicate that air traffic numbers rise by about 7% QoQ in the Jan-March quarter. Traffic at Suvarnabhumi Airport (during Jan 1-20) continued to strengthen—international passengers increased by 9.8% YoY. Note that domestic passenger numbers at Suvarnabhumi dived 47% YoY, due to the relocation of low-cost carriers to Don Mueang Airport since Oct 2012.

Earnings upgrades on strong passenger growth prospects

Thailand remains one of the world's most popular travel destinations. In 2012, foreign arrivals hit a new record of 22.3m people, driven by Asian tourists (up 31% YoY). The Tourism Authority of Thailand (TAT) forecasts 24.5m arrivals (up 10% YoY) this year. AOT recently revised up its passenger growth forecast to 9.2% YoY to 83m people from 78m previously. Based on historical data, we think that AOT's forecast is likely to be too conservative (see Figure 4).

We, therefore, assume slightly higher air traffic growth numbers for AOT (Figure 5), so have revised up our FY13 net profit forecast by 10% to Bt8,604m and our long-term earnings projections by 11%. As a result, our DCF-derived end-Sept 2013 target price rises to Bt125 (from Bt95).