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Thailand Aviation Sector Summary

Core Content

The Thailand aviation sector is under pressure in 2014 due to a combination of overcapacity, political instability, and intensifying fare wars. The report highlights the performance of key airlines and airports, along with valuation metrics and investment recommendations.

Main Viewpoints

1. Sector Outlook: Underweight

• The aviation sector in Thailand is expected to face challenges in 2014, with overcapacity and political uncertainty being major concerns.
• The report suggests that value investors are closely watching the sector, but the timing of a market bottom is unclear.

2. Political Uncertainty

• The Thai elections on Feb 2, 2014, are a critical factor. Political instability could lead to airport closures or government intervention, which would negatively impact the sector.
• There is a risk of army intervention if the situation escalates, which could prolong the crisis.

3. Market Dynamics

• Overcapacity is a key concern, with major airlines adding 17 new aircraft in 2014, a 55% increase compared to 2013.
• This will likely reduce yields and increase competition, especially with the entry of Thai Lion Air (TLA).

Key Stock Highlights

Key Challenges and Opportunities

Overcapacity

• Airlines are adding more aircraft, leading to 7-8% capacity growth in 2014, double the previous two-year average.
• This will pressurize yields and reduce profitability, especially for high-beta stocks like AAV and THAI.

Fare War

• Thai Lion Air has initiated a 30% fare discount, prompting AAV and THAI to retaliate.
• This is expected to lower average fares and reduce load factors, impacting revenue.

Political Impact

• Political unrest is affecting demand for air travel, with tourist arrivals declining since October 2013.
• The Thai Tourism Authority has revised down its expectations for 2014.

Key Stocks Analysis

NOK Air (Buy)

• Focuses on rural routes, which are less affected by fare wars.
• Has no competition on 60% of its routes and strong margins.
• Offers a dividend yield of 7.9%, the highest among the listed airlines.
• Target price of THB29.25 implies a 56% upside, based on global LCC average 2014 PER of 10.9x.

AOT (Hold)

• Strong fundamentals with high profit margins, good cash flow, and a healthy balance sheet.
• However, political instability limits its ability to raise passenger service charges and expand at Suvarnabhumi Airport.
• Target price of THB169 offers a 6% upside, based on a DCF model with a WACC of 11.5% and 3% terminal growth.

AAV (Sell)

• Most affected by Thai Lion Air's entry, with overlapping routes and declining load factors.
• Cost pressures from higher airport charges and staff costs will further reduce profitability.
• Target price of THB3 implies a 26% downside, based on global LCC average 2014 PER.

THAI (Sell)

• Faces staff union issues, CEO resignation, and uncertain business direction.
• Although undervalued (P/BV 0.4x), the risks are too high for a buy recommendation.
• Target price of THB15.40 offers a 7% upside, but the uncertainty remains a key concern.

Strategic Positioning and Monopolistic Advantages

• Bangkok Aviation Fuel Services (BAFS) is the primary fuel supplier at both Don Muang and Suvarnabhumi airports.
• It has a monopoly at Don Muang and 90% market share at Suvarnabhumi.
• Despite fixed margins, BAFS has a strong earnings growth with a 5-year CAGR of 16.1%.

Investment Recommendations

• NOK Air is the sole BUY due to its insulated position and strong fundamentals.
• AOT is a HOLD due to limited upside and political risks.
• AAV and THAI are SELLs due to high exposure to fare wars and uncertain future.

Conclusion

The Thailand aviation sector is underweight in 2014 due to overcapacity, political instability, and intensifying competition. NOK Air stands out as the only BUY, while AOT is a HOLD and AAV & THAI are SELLs. Investors are advised to accumulate stocks in Q2-Q3 if the consolidation ends and demand rebounds.