Thai Airways International

Q4 2012 core number in line with model; next quarter to be even better

Thai Airways International Plc (THAI)

In line with estimate

THAI posted a 4Q12 net profit of Bt2,361m, a turnaround from a net loss of Bt5,388m in 4Q11 and up 35% QoQ. Stripping out an FX gain of Bt1,490m, a gain on an asset acquisition (an additional 10percent stake in Nok Air) of Bt1,584m and an asset impairment of Bt105m, the 4Q12 operation would have reported a core loss of Bt609m, shallower than the core loss of Bt6,223m in 4Q11, but a reversal from a core profit of Bt1,125m in 3Q12. The bottom-line beat our estimate and the consensus, due to the extra gains, while the core loss was in line with our model and the street number.

Results highlights

The drivers of the YoY core operational improvement were: 1) greater traffic numbers (despite a weaker passenger yield) and 2) a lower effective tax rate. Passenger traffic increased by 22% YoY (and 5% QoQ) to 15,843m RPK, while the cabin factor rose to 76.2% in 4Q12 from 65% in 4Q11. However, the passenger yield (including fuel and insurance surcharges) softened 2% YoY (but rose 2% QoQ) to Bt2.76/RPK. Meanwhile, the effective tax rate declined to -108% in 4Q12 from 4% in 4Q11.

The weaker QoQ core number was due to: 1) higher jet fuel costs (up 5% QoQ to $135/bbl) and 2) higher personnel expenses (the staff bonus was booked in its entirety in 4Q12 instead of being accrued through the year—THAI's normal modus operandi).

Outlook

We expect a core operational turnaround to black ink in 1Q13, driven by greater traffic numbers, a higher passenger yield and lower personnel expenses (no one-time bonuses are to be booked during the quarter). The historical data show that THAI's first-quarter traffic volume normally expands by about 6% QoQ. In addition, passenger yield is expected to fatten both YoY and QoQ, driven by efficiency improvements, such as re-routing flights to destinations that generate higher yields.

What's changed?

We maintain our FY13 net profit forecast of Bt6,014m unchanged.

Investment thesis

In our view, expectations of QoQ earnings growth in 1Q13 (high season) will catalyze the share price in the near-term. Furthermore, the forecast FY13-15 earnings CAGR of 32%, driven by capacity expansion and yield improvement, should bring on more stock price appreciation. THAI currently trades at an FY13 PEG of only 0.3x and an EV/EBITDA ratio of 5.2x, discounts to both its long-term averages and to regional means.