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Thai Airways International

Too soon to play restructuring theme

Thai Airways International Plc (THAI)

Investment thesis

The key messages at the analyst meeting yesterday reaffirmed our cautious view toward THAI. Expectations of weak FY14 earnings will continue to make for an uninspiring share price performance. Moreover, THAI's business restructuring plan is unlikely to bear fruit in the near-term and we think the plan entails execution risk, given the firm's inflexible cost structure. The stock currently trades at a YE14 PBV of 0.9x—0.2SDs above its long-term average of 0.8x, but comparable with the Asian mean.

Expect an improvement in 3Q14, but still red ink

The better political climate together with incentives launched by state agencies/SOEs should boost foreign arrivals and THAI's passenger numbers QoQ in 3Q14. There were nascent recovery signs in July—the cabin factor increased to 70.2percent from 63.5% in 2Q14. Moreover, THAI's passenger numbers continued to rise in August—bookings as of August 14 were 72.5%. The passenger yield should also improve YoY in 3Q14, as promotional fares are unlikely to be as generous as they were in 3Q13. As such, we expect THAI's 3Q14 core operation to improve QoQ and YoY, but it will remain in red ink.

Restructuring plan in place; execution risk a factor to watch

A major business restructuring plan will be submitted to the SOE Super Board for approval on August 23. The plan covers four areas: 1) financing, 2) operations, 3) corporate management and 4) personnel—immediate (2H14), medium-term (2014-15), and long-term (2014-18). For 2H14, THAI plans to raise Bt3bn in extra revenue by re-routing flights, launching promotional campaigns and expanding its cargo business. The firm also plans to cut operating expenses by Bt4bn in 2H14 by dropping loss-making routes, reducing fuel consumption and trimming other expenses.

While we are optimistic about its business restructuring plan, we are concerned about the execution risk—it's very difficult to make sweeping changes to big organizations if they go against entrenched interests.

S-T cash call concern relieved, but L-T possibility still exists

THAI spent heavily to expand its fleet in FY13-14, while the political turmoil and weak economy have impacted on its revenue. The firm's cash flows have declined and its interest-bearing debt (IBD)/equity ratio hit a new high of 4.0x at end-June 2014, up from 2.7x at end-June 2013. The firm's immediate plan is bridging loans from the Ministry of Finance (Bt27bn) and commercial banks (Bt10bn) totaling Bt37bn. That relieves our concern over recap risk for the short-term. But management hasn't ruled out capital-raising at some stage in the future.

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