Thai Airways. Thailand Company Focus. Impressive 1Q10, as expected

Transcription

1 Thailand Company Focus Bloomberg: THAI TB Reuters: THAI.BK DBS Group Research. Equity 17 May 1 BUY Bt26. SET : Price Target : 12-month Bt 33. Reason for Report : 1Q1 result review Potential Catalyst: Stable fuel cost, easing political uncertainities, and recovering travel demand. Analyst Nalyne Viriyasathien nalynev@th.dbsvickers.com Impressive 1Q1, as expected 1Q1 profit surged 36% y-o-y and % q-o-q to Bt1.7bn within our and market expectations, led by strong traffic, yields and Bt5.7bn forex gain 2Q1F might weaken, but full year result will remain strong Forecasts and Bt33. TP are intact, undemanding valuation and 26% upside; maintain BUY Price Relative Bt Relative Index ( LHS ) Relative SET INDEX ( RHS ) Forecasts and Valuation FY Dec (Bt m) 8A 9A 1F 11F Turnover, ,3 185, ,489 EBITDA 14,952 31,758 44,4 51,178 Pre-tax Profit (23,) 8,17 16,624 22,291 Net Profit (21,379) 7,344 14,465 15,512 Net Pft (Pre Ex.) (7,868) 4,75 14,465 15,512 EPS (Bt) (12.6) EPS Pre Ex. (Bt) (4.6) EPS Gth Pre Ex (%) nm nm 7 7 Diluted EPS (Bt) (12.6) Net DPS (Bt) BV Per Share (Bt) PE (X) nm PE Pre Ex. (X) nm P/Cash Flow (X) nm EV/EBITDA (X) Net Div Yield (%) P/Book Value (X) Net Debt/Equity (X) ROAE (%) (37.7) Earnings Rev (%):.. Consensus EPS (Bt): ICB Industry : Consumer Services ICB Sector: Travel & Leisure Principal Business: THAI operates domestic, regional and intercontinental flights to key destinations around the world and within Thailand. Corporate Governance CG Rating (9) Source of all data: Company, DBS Vickers, Bloomberg Record 1Q1 result. This was led by (i) higher passenger traffic (81.1% vs 76.4% in 1Q9) and yield, (ii) higher freight load factor (% vs 44.8% in 1Q9) with stronger Thai exports and capacity from blocked space, (iii) wellcontrolled operating expenses, and (iii) Bt5.7bn forex gain. Expect weak 2Q1F. Despite the Red Shirts rally, Apr1 cabin factor remained solid at 72%, but ASK edged down 3% y-o-y. May1 cabin factor fell to 64%, and Jun1 advance booking is now at %. Hence, 2Q1F cabin factor could fall below break-even of 68%. Coupled with discounted airfares for May-Jun1, 2Q1F core operation is likely to be loss-making. But we are retaining our forecasts for now as 1Q1 result is already 73% of our full year forecast, and 2Q1F bottom line may not be a large loss as THAI should book another huge forex gain given the still weakening Euro. Also, the rally is happening during the low tourist season, and the impact on our full year assumptions should not be significant. Normally, it also does not take long for Thai tourism to rebound after a crisis. Reiterate BUY. We are also retaining our Bt33. target price that is based on.85x 1 P/BV (5-year historical average). The anticipated weak 2Q1F is pressuring the share price, but full year operation should remain strong, and we expect operations to recover quickly when the political situation is resolved. Also, valuation remains undemanding at 4x EV/EBITDA and.7x P/BV (1) and there is 26% upside potential to our target price. At A Glance Issued Capital (m shrs) 1,699 Mkt. Cap (Btm/US$m) 45,21 / 1,391 Major Shareholders Ministry of Finance (%) 51. Vayupak Fund (%) 17.1 Thai NVDR (%) 4.5 Free Float (%) 27.4 Avg. Daily Vol.( ) In Singapore, this research report or research analyses may only be distributed to Institutional Investors, Expert Investors or Accredited Investors as defined in the Securities and Futures Act, Chapter 289 of Singapore. Refer to important disclosures at the end of this report ed: SGC / sa: CS

2 1Q1 result summary Record 1Q1 within expectations. 1Q1 net earnings jumped 36% y-o-y and % q-o-q to Bt1.7bn, led by (i) high tourist season and improvement in passenger traffic and yield, (ii) higher freight load factor amid recovering Thailand exports and higher capacity from blocked space, (iii) well-controlled operating expenses, and (iii) Bt5.7bn forex translation gain for its foreign currency loans. Solid core profit. Excluding the extra gain, 1Q1 core profit remained strong at Bt5.1bn, surging 53% y-o-y, but down 16% q-o-q due to higher fuel cost and effective tax rate. THAI: 1Q1 result summary FY Dec (Btm) 1Q9 4Q9 1Q1 Chg y-o-y Chg q-o-q Revenue,683 47,79 48,913 % 3% COGS (32,482) (37,1) (38,896) % 5% Gross Profit 8,1 1,9 1,17 22% (6%) SG&A (1,) (1,653) (1,598) 14% (3%) Other opt. (2,396) (2,233) (2,262) (6%) 1% Exp. EBIT 4,5 6,724 6,157 % (8%) Non-opt. Inc , % (21%) Int. Inc (58%) (5%) Int. Exp. (1,449) (1,442) (1,345) (7%) (7%) Associates (1) (11) (7) 477% (%) Extra 4,522 2,88 5,61 24% 1% Gain/(Loss) Pretax Profit 8,64 9,199 11,38 % 23% Tax (177) (269) (564) 219% 11% MI (18) (17) () 9% 17% Net Profit 7,869 8,913 1,724 36% % Norm Profit 3,346 6,14 5,114 53% (16%) EPS % % EBITDA 1,64 13,254 12,258 22% (8%) Gross Margin.2% 22.2%.5% SGA % Sales 3.4% 3.5% 3.3% EBITDA 24.7% 27.8% 25.1% margin EBIT Margin 1.8% 14.1% 12.6% Net Margin 19.3% 18.7% 21.9% Eff. Tax Rate (2.2%) (2.9%) (5.%) Source: DBS Vickers THAI: Quarterly passengers cabin factor Q6 2Q7 4Q7 2Q8 4Q Q Q9 Improved passenger yield. 1Q1 passenger yield inched up to Bt2.2/km (from Bt2.1/km in 4Q9), thanks to improved travel demand, which allowed THAI to demand higher ticket prices and reduce contribution from the sale of low fare tickets, and improve RBD (Reservation booking designator) by giving priority to selling more higher-priced tickets and premium seats by enhancing relationships with corporate accounts and offering value-add offers. Capacity edged up. Passenger capacity or ASK (available seat per kilometer) rose 11% y-o-y to 19,43m in 1Q1. Along with the increase in cabin factor, RPK (revenue passenger per kilometer) increased 8% q-o-q and 18% y-oy to Bt15.4bn. Total passenger revenue was Bt.6bn, up 17% y-o-y and 3% q-o-q. THAI: 1Q1 Revenue breakdown Freight 12.3% Mail.5% Others 4.1% Higher cabin factor. Average passenger cabin factor improved to a strong 81.1% in 1Q1 compared to 75.4% in 4Q9 and 76.4% in 1Q9, thanks to improving travel demand amid the economic recovery and easing political tension in Thailand at the beginning of the year. The Red Shirts rally started on 12 Mar 1, and had minimal impact on THAI operation in the second half of March. Passenger 83.1% Page 2

3 Increased freight load factor. THAI s freight load factor improved significantly to 59.5% in 1Q1 from 44.8% in the previous year, as the economic recovery had boosted exports from Thailand, especially perishables and computer parts. Also, THAI had recently entered into a 2-year aircraft block space agreement and started using two Boeing 777 freighters for its growing cargo business since Mar1. These mainly serve Mid-east Europe, Australia, and North Asia, added 5-8% to THAI s cargo capacity, and allows THAI to be more committed to client delivery and volume requirements. THAI: Freight load factor and yield F.F (%) Freight Load Factor (LHS) Freight Yield (RHS) Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec THB/RPK Well-managed operating expenses. 1Q1 total operating expenses rose 18% y-o-y, but this was mainly led by (i) 31% y-o-y increase in fuel cost as a result of higher fuel consumption following higher ASK and increase in average jet fuel cost, (ii) 25% y-o-y increase in flights operations (including crew, flight service, and maintenance expenses) also due to higher utilization, and (iii) 1% higher personnel expense y-o-y due to 4% average salary increase and.5 month employees bonus payments at the end of FY9. Effective fuel cost management. Fuel expense in 1Q1 jumped 31% y-o-y to Bt14.3bn. But this is considered low and effective given that average market jet fuel price rose 54% y-o-y to US$85.2/barrel in 1Q1 from an average of US$55.2 in 1Q9, while fuel consumption rose 13% y-o-y due to 11% higher capacity (ASK). This is attributed to its successful and improved fuel hedging policy. Fuel hedging in 1Q1 is 44% of total consumption, compared to 23% in 1Q9. The fuel surcharge in 1Q1 covered 1-16% of the fuel price. 5.. THAI: Quarterly operating expense Btbn % Q8 2Q8 3Q8 4Q8 1Q9 2Q9 3Q9 4Q9 1Q1 Personnel Fuel and oil Inventories and supplies Lease of aircraft and spare par Flight operations Depreciation Marketing Insurance Other expense Passengers' cabin factor (RHS) Global: Jet Fuel Price vs Crude Oil Price US$/bbl Jan-7 Apr-7 Jul-7 Oct-7 Jan-8 Apr-8 Jul-8 Jet Kerosene Source: Bloomberg, DBS Vickers Oct-8 Jan-9 Apr-9 Jul-9 Oct-9 Jan-1 Apr-1 Brent Compensation for delayed delivery of planes. Other income in 1Q1 totaled Bt853m, a 67% jumped from last year. The bulk of this is the Bt353m compensation for the delayed delivery of six A38-8 planes booked in 1Q1. Pending compensation. THAI is entitled to receive Bt2.7bn compensation for the delayed delivery of six A38-3. It has already received and booked a total of Bt1.1bn in 4Q9 and 1Q1 under other income. The remaining Bt1.6bn will be realized between now and the first delivery in Aug 12. Page 3

4 Higher tax rate. 1Q1 pretax profit surged % y-o-y and 23% q-o-q to Bt11.3bn, but bottom line rose by a smaller quantum (36% y-o-y and % q-o-q) due to higher effective tax rate of 5% vs 2.9% in 4Q9 and 2.2% in 1Q9, as THAI has almost exhausted tax losses carried forward (incurred during the economic downturn and spiking fuel costs in 8). The effective tax rate will be at the regulatory rate of 3% for subsequent quarters. Forex gain due to stronger baht. THAI booked Bt5.7bn forex gain in 1Q1 due to the stronger baht against the euro, as 38% (at end FY9) of its Bt157bn outstanding loan was denominated in euro. The baht strengthened 8% q-o-q from Bt47.73/Euro at end Dec9 to Bt43.69 at end Mar1. Note that this is an unrealized translation gain and does not affect its cashflow and core operations. Its operating (income-expense) model creates a natural forex hedge. Forex: THB/EURO Bt /2/6 3/27/6 6/19/6 9/11/6 12/4/6 2/26/7 5/21/7 8/13/7 11/5/7 1/28/8 4/21/8 7/14/8 1/6/8 12/29/8 3/23/9 6/15/9 9/7/9 11/3/9 2/22/1 Source: Reuters, DBS Vickers Lower net gearing. At end 1Q1, THAI s financial position had improved slightly. Net gearing fell to 2.1x from 2.6x at end FY9, thanks to higher cash from operations. Bvps was at Bt37.7. Outlook Apr-May operations weaken. Given stronger political uncertainty due to the Red Shirts demonstration in Bangkok since April, THAI has seen weaker passenger cabin factor and bookings for the months ahead. Apr1 cabin factor remained solid at 72% and still higher than 71% in Apr9, but ASK has edged down 3% y-o-y. May1 cabin factor has weakened to c. 64%, and advance booking in Jun1 in now at c. %. THAI: Monthly passenger cabin factor % Jan8 Mar8 May8 Jul8 Sep8 Nov8 Jan9 Mar9 May9 Jul9 Sep9 Nov9 Jan1 Mar1 May1 Cabin Factor YoY Growth Book Jun1 3% % 1% -1% -% -3% 2Q1F expected to be weak. Given low tourism season in the second quarter, we had earlier assumed break-even for 2Q1F. But now with weak cabin factor in Apr1 and likely in May-Jun1, 2Q1F average cabin factor is likely to be below THAI s break-even of 68%. Coupled with discount airfare offers for May-Jun1 that should lower passenger yield, THAI s core operation could register a loss in 2Q1. But maintain forecasts for now. 2Q1F might derail from our assumptions, but we are maintaining our estimates for now as 1Q1 result is already 73% of our full year forecast and we believe 2Q1F reported loss might not be large because THAI could book a forex translation gain as the baht continues to strengthen against the euro. Also, the demonstrations are happening during the low tourist season and the impact on our full year assumptions should not be significant, and it normally does not take long for Thai tourism to rebound after a crisis. However, we will assess the impact again following more information from the company, and when the rally ends, possibly by the end of this month. For now, we still expect FY1F earnings to jump 97% y-o-y (core earning +7% y-o-y) to Bt14.5bn on the back of improving travel demand, higher yields, and effective management of fuel and operating costs. % Page 4

5 Valuation Reiterate BUY. We are also retaining our Bt33. target price that is based on.85x 1 P/BV (5-year historical average). The anticipated weak 2Q1F is pressuring the share price, but full year operation should remain strong, and we expect operations to recover quickly when the political situation is resolved. Also, valuation remains undemanding at close to 1SD of its 5-year PBV band, 4.1x EV/EBITDA, and.7x P/BV (1), still the cheapest relative to regional peers averages of 11.7x and 1.6x, respectively. Coupled with 26% upside potential to our target price and generous 8.3% dividend yield, we reiterate our BUY call for THAI. Key risks to our call are: (i) lingering or worsening political uncertainty in Thailand, (ii) spiking fuel cost, and (iii) new natural disasters at tourist destinations and epidemics. THAI: P/BV Band PBV (x) Source: Reuters, DBS Vickers +2 sd +1 sd Mean -1 sd -2 sd Regional Peers comparison Market PE P/BV EV/EBITDA Div Yield ROE Share Price Cap (x) (x) (x) (%) (%) Performance BB Ticker Name US$m 1F 11F 1F 11F 1F 11F 1F 1F 1M 3M 1Y YTD 293 HK Equity CATHAY PACIFIC 7, (7.) AIRWAYS 261 TT Equity CHINA AIRLINES LTD 1, (.2) HK Equity CHINA SOUTHERN 6, (12.8) AIRLINES CO-H 2618 TT Equity EVA AIRWAYS CORP 1, (3.9) KS Equity KOREAN AIR LINES CO LTD 4,494 nm nm (11.2) MAS MK Equity MALAYSIAN AIRLINE SYSTEM BHD 2,138 nm (2.6) (7.6) 7.3 (6.9) (22.3) SIA SP Equity SINGAPORE AIRLINES LTD 12, (6.) 1.4 (2.7) 39.5 THAI TB Equity THAI AIRWAYS INTERNATIONAL 1, Average (simple) Page 5

6 Income Statement (Bt m) Balance Sheet (Bt m) FY Dec 8A 9A 1F 11F FY Dec 8A 9A 1F 11F Turnover, ,3 185, ,489 Net Fixed Assets 7,64 213,5 216, ,323 Cost of Goods Sold (19,81) (137,514) (149,295) (156,49) Invts in Associates & JVs 1,337 1,241 1,272 1,34 Gross Profit 1,37 24,89 36,97 42,4 Other LT Assets 9,12 9,823 9,87 9,372 Other Opng (Exp)/Inc (17,62) (15,146) (16,48) (17,98) Cash & ST Invts 7,976 14,6 21,348,1 Operating Profit (7,25) 8,943,49 25,342 Inventory 6,779 6,198 6,784 7,51 Other Non Opg (Exp)/Inc 1,994 2,94 2,39 2,183 Debtors 15,829 16,4 18,539 19,849 Associates & JV Inc (65) (9) Other Current Assets 11,538 1,237 1,91 1,365 Net Interest (Exp)/Inc (4,992) (5,559) (5,526) (5,299) Total Assets 259, , , ,865 Exceptional Gain/(Loss) (13,511) 2,638 Pre-tax Profit (23,) 8,17 16,624 22,291 ST Debt 36,6 25,49 27,359 19,155 Tax 2,285 (691) (2,78) (6,687) Other Current Liab 62,378 54,961 59,535 62,434 Minority Interest (65) (72) (81) (91) LT Debt 16, ,41 122, ,3 Preference Dividend Other LT Liabilities 8,652 8,589 8,974 8,795 Net Profit (21,379) 7,344 14,465 15,512 Shareholder s Equity 45,3 53,56 66,962 78,637 Net Profit before Except. (7,868) 4,75 14,465 15,512 Minority Interests EBITDA 14,952 31,758 44,4 51,178 Total Cap. & Liab. 259, , , ,865 Sales Gth (%) 1.4 (19.2) Non-Cash Wkg. Capital (28,231) (22,323) (23,31) (25,169) EBITDA Gth (%) (45.8) Net Cash/(Debt) (134,647) (1,2) (128,139) (121,874) Opg Profit Gth (%) (176.9) nm Net Profit Gth (%) (736.8) nm Effective Tax Rate (%) N/A Cash Flow Statement (Bt m) Rates & Ratio FY Dec 8A 9A 1F 11F FY Dec 8A 9A 1F 11F Pre-Tax Profit (23,) 8,17 16,624 22,291 Gross Margins (%) Dep. & Amort.,48,73 22,54 23,589 Opg Profit Margin (%) (3.5) Tax Paid (1,478) 2,285 (691) (2,78) Net Profit Margin (%) (1.7) Assoc. & JV Inc/(loss) 65 9 (62) (64) ROAE (%) (37.7) Chg in Wkg.Cap. 3, (8,885) (8) (2,741) ROA (%) (7.9) Other Operating CF 13,188 6, ROCE (%) (3.4) Net Operating CF 11,224 28,411 37,693 41,58 Div Payout Ratio (%) N/A Capital Exp.(net) (21,3) (16,428) (25,211) (31,113) Net Interest Cover (x) (1.4) Other Invts.(net) (2) Asset Turnover (x) Invts in Assoc. & JV (31) (32) Debtors Turn (avg days) Div from Assoc & JV Creditors Turn (avg days) Other Investing CF 944 1,858 Inventory Turn (avg days) Net Investing CF (,39) (14,472) (25,238) (31,147) Current Ratio (x) Div Paid (3,814) (637) (425) (3,738) Quick Ratio (x) Chg in Gross Debt (5,466) 15,444 (5,413) (7,12) Net Debt/Equity (X) Capital Issues Net Debt/Equity ex MI (X) Other Financing CF (2) (21,892) Capex to Debt (%) Net Financing CF (9,283) (7,85) (5,756) (1,658) Z-Score (X) Net Cashflow (18,368) 6,854 6,698 (747) N. Cash/(Debt)PS (Bt) (79.3) (82.6) (75.4) (71.7) Opg CFPS (Bt) Free CFPS (Bt) (6.) Quarterly / Interim Income Statement (Bt m) Segmental Breakdown / Assumptions FY Dec 2Q9 3Q9 4Q9 1Q1 FY Dec 8A 9A 1F 11F Turnover 34,362 38,848 47,79 48,913 Revenues (Bt m) Cost of Goods Sold (32,851) (35,8) (37,1) (38,896) Passenger and excess 164, , , ,4 Gross Profit 1,511 3,768 1,9 1,17 Freight 25,841 18,525 22,1 23,126 Other Oper. (Exp)/Inc (3,774) (3,69) (3,886) (3,8) Mail Operating Profit (2,263) 78 6,724 6,157 Other activities 9,46 7,775 8,568 8,984 Other Non Opg (Exp)/Inc , Associates & JV Inc 31 (27) (11) (7) Total, ,3 185, ,489 Net Interest (Exp)/Inc (1,382) (1,393) (1,41) (1,314) Exceptional Gain/(Loss) (1,95) (2,787) 2,88 5,61 Key Assumptions Pre-tax Profit (5,294) (3,862) 9,199 11,38 Passenger's cabin factor (%) Tax (92) (154) (269) (564) Passenger's ASK (m) 75, ,31. 73, ,468.9 Minority Interest (17) (19) (17) () Passenger's RPK (Btm) 56, , , ,318.6 Net Profit (5,3) (4,35) 8,913 1,724 Freight load factor (%) Net profit bef Except. (3,498) (1,247) 6,14 5,114 Jet fuel price (US$/gallon) EBITDA 3,165 5,675 13,221 12,227 Sales Gth (%) (15.5) EBITDA Gth (%) (68.3) (7.5) Opg Profit Gth (%) (151.4) nm 8,538. (8.4) Net Profit Gth (%) (168.7) (25.3) nm.3 Gross Margins (%) Opg Profit Margins (%) (6.6) Net Profit Margins (%) (15.7) (1.4) Page 6

7 DBSV recommendations are based an Absolute Total Return* Rating system, defined as follows: STRONG BUY (>% total return over the next 3 months, with identifiable share price catalysts within this time frame) BUY (>15% total return over the next 12 months for small caps, >1% for large caps) HOLD (-1 to +15% total return over the next 12 months for small caps, -1% to +1% for large caps) FULLY VALUED (negative total return i.e. > -1% over the next 12 months) SELL (negative total return of > -% over the next 3 months, with identifiable catalysts within this time frame) Share price appreciation + dividends DBS Vickers Research is available on the following electronic platforms: DBS Vickers ( Thomson ( Factset ( Reuters ( Capital IQ ( and Bloomberg (DBSR GO). For access, please contact your DBSV salesperson. GENERAL DISCLOSURE/DISCLAIMER This document is published by DBS Vickers Securities (Thailand) Co., Ltd. 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The analyst also certifies that no part of his/her compensation was, is, or will be, directly, or indirectly, related to specific recommendations or views expressed in this report. As of 17 May 1, the analyst and his / her spouse and/or relatives who are financially dependent on the analyst, do not hold interests in the securities recommended in this report ( interest includes direct or indirect ownership of securities, directorships and trustee positions). COMPANY-SPECIFIC / REGULATORY DISCLOSURES 1. DBS Vickers Securities (Thailand) Co., Ltd. and its subsidiaries do not have a proprietary position in the mentioned company as of 14-May-1 2. DBSVT, DBSVR, DBSVS, DBS Bank Ltd and/or other affiliates of DBSVUSA, may beneficially own a total of 1% or more of any class of common equity securities of the mentioned company as of 17 May 1 3. Compensation for investment banking services: i. 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