Target price : Bt13.40
Recommendation : BUY
Closing Price (20 April 09) : Bt10.50
1Q09 operating profit pre-FX expected to be up YoY and QoQ
- Our estimate assumes that passenger and cargo traffic will drop 20.26% and 35.74% YoY respectively in 1Q09. Passenger revenue, freight and mail revenue and revenues from other activities would fall
back. Total operating revenue is accordingly forecast to shrink 22.67% YoY to Bt42,414.17m in 1Q09.
- Costs are expected to fall sharply as a result of declining jet fuel prices. SG&A expenses would also slip back. We expect THAI to report a rise of 23.97% YoY in 1Q09 operating profit pre-FX to Bt3,315.45m. Including an expected huge FX gain, we estimate the national carrier's 1Q09 net profit to be about Bt7,531.45m, up as high as 239.85%.
- We revise our 2009 full-year forecast upward to an operating profit pre-FX of Bt3,171.51m from a previous loss estimate. The upward earnings revision reflects the still low level of the price of jet fuel, a major cost component and expectations that THAI will swing back to a profit in 4Q09 on the back of a bullish seasonal bias despite the lingering impact of the red-shirted United Front for Democracy against Dictatorship (UDD) protest in 2Q09-3Q09. To reflect higher earnings expectations, we lift our price target to Bt13.40/share from a previous price estimate of Bt9/share and we also raise our recommendation for THAI to 'BUY' from 'HOLD.'
1Q09 operating profit pre-FX expected to be up both YoY and QoQ
Flag carrier THAI reported a drop of 21.31% YoY and 32.99% YoY in passenger and cargo traffic to 4,105 million revenue passenger kilometers (RPK) and 130 million revenue ton kilometers (RTK) respectively in Feb 2009. For the first two months of 2009, passenger and cargo traffic slipped 21.11% and 34.01% respectively. Our forecast assumes that passenger and cargo traffic will fall further on a YoY basis in Mar. On this basis, we forecast a 20.26% drop in 1Q09 passenger traffic. The average cabin factor for the quarter is expected to fall to 76.4% from a year-ago level of 81.6%. Passenger revenue is predicted to contract 21.26% to Bt35,936.06m. Cargo traffic for the quarter is expected to plunge 35.74% and cargo load factor is forecast to fall to 43% from a year-ago level of 54.4%. Freight and mail revenue is accordingly projected to shrink 32.74% to Bt4,429.60m. Revenues from other activities are forecast to edge 14.44% lower. Total operating revenue is expected to decline 22.67% YoY to Bt42,414.17m. Costs of sales and services would ease back by 27.75% due chiefly to a drop in jet fuel costs and other expenses, except for depreciation charges, which are expected to drift slightly higher. SG&A expenses are predicted to drop by 16.76% on falling personnel, advertising and consumables expenses. Interest expenses would rise 8.29%. THAI should be tax-free in 1Q09 thanks to tax credits from losses in 2008. Overall, we forecast flag carrier THAI to report an operating profit pre-FX of Bt3,315.45m, up 23.97% YoY. In 1Q09, THAI is expected to rake in a FX gain of Bt4,216m due to the baht's strength against the euro and the yen despite its weakness against the US dollar, turning around from a FX loss of Bt662.52m in 1Q08. All in all, we estimate THAI's 1Q09 net profit to come in at Bt7,531.45m, up as high as 239.85% YoY and 151% QoQ.
Upward earnings revision for 2009 to a profit from a loss
Typically, the airline business is seasonally weak and slips to a loss in the second quarter. The cocktail of (i) the lingering impact of the red-shirted UDD anti-government rally though the protest has already been dispersed, (ii) the state of emergency still in place, and (iii) travel advisories for Thailand issued by several countries in response to the political unrest would add further pressure to earnings. However, luck is still on the national carrier's side as it still have time to win back tourist confidence before the high travel season starts in 4Q09 and there is no effect from airport siege as experienced in 4Q08. Given a Bt8,715.76m provision for antitrust charges over air cargo cartel and price fixing linked to cargo fuel surcharges and impairment loss for aircrafts to be decommissioned and disposed in 4Q08, though things remain uncertain whether other exceptional charges will be made, we believe the figure would fall dramatically. As THAI is expected to generate profits in 1Q09 and 4Q09 due to a seasonal effect despite the lingering impact of the red-shirted UDD anti-government protest in 2Q09-3Q09, we therefore raise our 2009 revenue forecast for the national carrier to Bt149,495m. We also revise our 2009 earnings forecast upward to an operating profit pre-FX of Bt3,171.51m from a previous loss estimate of Bt4,887.74m. The upward earnings revision reflects a dramatic drop in jet fuel prices from a year ago and the absence of tax expenses thanks to tax credits from losses in 2008. To reflect higher earnings expectations, we lift our price target to Bt13.40/share from a previous price estimate of Bt9/share. The target is based on a P/CF of 1x. We also raise our recommendation for THAI to 'BUY' from 'HOLD.'
By Phillip Securities (Thailand) Plc. on Apr 21, 2009
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