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Airports of Thailand

Brilliant long-term growth path reaffirmed

Airports of Thailand Plc (AOT)

Investment thesis

The key messages at the analyst meeting reaffirmed our optimistic view of AOT's growth prospects. However, an expected QoQ earnings contraction in 4Q14 (July-Sept) may cap the share price performance in the near-term. But we expect the stock to rebuild momentum once we enter Oct-Dec high season and tourist arrivals fully rebound. There would be scope for upside to our earnings forecast if PSCs were to increase. The stock currently trades at a forward PEG ratio of 2.3x, a discount to the regional average of 2.4x.

4Q14 (July-Sept) earnings to soften despite traffic improvement

The better political climate together with incentives launched by state agencies/SOEs, such as visa fee exemptions for Chinese tourists, should boost foreign arrivals and AOT's passenger numbers and aircraft movement QoQ in the July-Sept quarter. There were nascent recovery signs in July—a decline of only 3% YoY in total passenger numbers against an 11% YoY drop in June. Furthermore, total passenger numbers during 1-17 August rose 1% YoY—the first YoY growth in three months.

Despite expectations of an air traffic recovery, we forecast that AOT's core profit will decline QoQ in 4Q14, as personnel expenses normally rise in the July-Sept period on the payment of staff bonuses. In addition, we anticipate that 4Q14 core earnings will soften YoY, as international passenger numbers (which pay a passenger service charge of Bt700/pax compared to Bt100/pax for domestic passengers) have yet to normalize.

Green light for airport expansion plans expected by Sept 2014

The Don Muang Airport (Phase 2) and Phuket Airport expansions are in progress. Other airport expansion plans for FY15-22—Suvarnabhumi Airport (Phase 2) (and/or a domestic terminal), Don Muang Airport (Phase 3), Phuket Airport (Phase 2), Suvarnabhumi Airport (Runway 3), and Suvarnabhumi Airport (Phase 3)—are expected to get the green light from the govt by Sept 2014 (see Figure 2). Given its strong balance sheet (a net debt/equity ratio of 0.3x at end-June) and its ability to self-finance projects, we expect AOT to receive approval for these projects. As such, there is scope for upside to its long-term earnings forecast (beyond FY17).

Non-aero revenue would be another growth driver

In addition to the airport expansion projects, which will boost its aeronautical (aero) revenue, AOT plans to boost its non-aeronautical (non-aero) income by renting vacant land for the development of commercial areas. The firm targets increasing its non-aero proportion of revenue to at least 50% in FY19 from 41% currently. The greater proportion of non-aero revenue would imply higher profitability, as commercial areas generate fatter EBITDA margin than aero business (32% against 17%).

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