Panic in the Skies! Turbulence Ahead for Thai Aviation Shares

Retracing five breaking news, 5 aviation shares faces heavy battles! Gas Price Spike – Weakened Baht-Phuket Boat Tragedy has staggered share prices for 7 consecutive months.

The first half of 2018 has been filled with hardship for companies listed in the Securities Exchange of Thailand (SET). With aviations being hit hard from negative factors on all fronts, higher fuel costs, and a weakened Baht that has hit its lowest point within almost a year compared to approximately 33 baht/dollar in August 2017. Furthermore, the capsized boat accident in Phuket on the 5th of July is expected to result in a declining number of Chinese tourists, and cloudy forecasts in performances within the third quarter of 2018.

While the 2nd – 3rd quarter of 2018 is considered the Low Season for Thailand’s tourism, share prices have been headed towards gloomy weathers since the beginning of the year. The sharp downturn can be seen in stock prices of the commercial aviation shares in the past 7 month when comparing prices from  29/12/2017 to 25/07/2018, with share prices of AOT, THAI, BA, AAV, and NOK all staggering in the red.

 

However, even with the downturn in all of the 5 share prices, leading brokers in Thailand still sees strong foundations, and interesting business plans for sound investments. On that note, the “Kaohoon online team” has roundup analyses on the securities in the sector for use as guidelines in decision making as follows.

TRINITY SECURITIES COMPANY LIMITED said in a analysis that in Q1/2018, 3.17 million Chinese tourists entered Thailand, a 30.15% increment yoy from a low baseline in Q1/2018 as a result from the suppression of the Zero-Dollar tour operators. Then in Q2/2018 there were 2.75 million tourists from China, a decrease of 13% qoq, but an increase of 21.28% yoy. This is due to 2018’s “Golden Week” long holidays of February resulting in the downturn in numbers qoq.

The capsized boat accident in Phuket on July 5th is expected to have impacts on Q3/2018 resulting in lower numbers of Chinese tourists, however, the ratio of Chinese tourists to the overall number for 2018 should still remain at 29-30%.  

As for the number of Russian tourists, recovery is eminent in the start of the year with growth at 18.33% yoy, though, in June 2018 the number was at 48,500 visitors, a 16% contraction yoy.

 

The Phuket low season (May-Sep) is a factor here because it is the main destination for Russian tourists, compound with the 2018 World Cup season adds to the decrease in numbers of Russian tourists. It is expected that in July of 2018, decrements in numbers would be mainly due to the World Cup. However, overall numbers of Russian tourists throughout 2018 continue to grow during Q4/2018 which will be the return of the High Season for Phuket.

The number of Russians entering Thailand peaked in 2013 at 1.7 million, but due to drastic depreciation of the Ruble, the number of Russians traveling abroad, and resulted in Thailand’s lowest numbers in 2015 at 0.88 million, a decrease by half from the year in comparison. However, signs of revitalization were seen in 2017 at 1.35 million Russian visitors, a 12.2% hike yoy from the previous year.

Though Q2 and Q3 are the Low Seasons for Thai Tourism, and the Phuket capsized boat tragedy may result in decrements in the number of Chinese tourists in Q3, it is still believed that Q4 will see a return of growth, and that the 38 million number of tourists is still achievable.

 

KGI SECURITIES (THAILAND) PUBLIC COMPANY LIMITED reports that the continuous decline in the aviation sector is due to 2 main factors. First being the Q2/2018 turnover reports contraction compared to Q1 due to the tourism industry’s Low Season, resulting in a significant downturn of number of tourists.

Second, is the short-term negative sentiments from the Chinese tourist boat capsizing that caused casualties. However, the repercussions are inconclusive in terms of the reductions in Chinese tourists figures having significant impacts to the point of rescaling the aviation sector or not. Estimations need to be made in Q4’s High Season whether the number of Chinese tourists will decline due to Chinese negative sentiments or not? And how will it manifest?   

Q2 and Q3 are considered the aviation business’ seasonal lows, making shares in the sector unattractive for investments. As for those who bought shares at higher prices than current tags, it is advised to hold on to those shares for further clarity in turnover reports in the last quarter of the year that may or may not result in expected growth.

With 2 important variables for the aviation sector’s assessment in the remainder of the year being the overall number of tourists reaching the benchmark of 38 million or not, and aviation fuel costs, if exceeding the 75 dollars/barrel perimeters might result in downturn of assessments as well.

Thus, AOT is our pick for its sound fundamental growth factors that are stronger than other operators in the sector, having a long-term investment plan, and being a security with little qoq fluctuation. The suitable rate is at 82 Baht, and advised focus on AOT’s clarity in its investment plan in 2H/2018, especially the upcoming concession bid for the Duty Free operations in Suvarnabhumi airport which is expected to be concluded at year’s end.

 

KT ZMICO SECURITIES COMPANY LIMITED stated in their analysis that THAI has set a 5 year goal after reorganization to make THAI one of the top 5 airlines in Skytrack ratings once again, from its current place at number 10 following behind the current top 1-5 which are Singapore Airlines, Qatar Airways, All Nippon Airways, Emirates, and EVA, budgets will be allocated towards achieving the goal of being a Premium Airline. However, high oil prices is a suppressing factor in current turnover results. THAI is 1 in 6 state enterprises undergoing reorganization.

Comment: prospect are neutral, though the announced strategy is a good one, but it will need some time to be proved. In the short-term, turnover results of Q2/2018 and Q3/2018 from THAI possibly remain as being losses from high oil prices, a weak Baht, and being the Low Season for Thai tourism.

However, an “Outperform” recommendation still stands for THAI, and the target price (P/BV) remains at 17.00 Baht, but oil prices and the weakening of the Baht must be cautiously monitored.

 

Mr. Puttipong Prasatthong-Osoth, the new director of  BANGKOK AIRWAYS PUBLIC COMPANY LIMITED (BA), managing director of Bangkok Airways has revealed that the company will be expanding in to the duty free business in order to generate more revenue associated with the aviation business, and that the prospects for growth in the number of tourists entering Thailand is foreseeable.

The company is meeting with 3 of its foreign affiliates, and expects to conclude their collaboration within 2-3 months to enter the bid for the concession of operating the duty free zone in Suvarnabhumi airport that AOT will be auctioning this year. Including the the duty free zone in U-Tapao airport that has connecting areas with the Eastern Economic Corridor (EEC), which is forecasted to have high growth probability. The company 3-year goal expects to generate a 5% ratio from the duty free business to its total income.  

Currently, the company operates the duty free zone in Samui airport in Surat Thani including the present one at U-Tapao airport, and at Luang Prabang airport after Bangkok Airways Holdings Co., Ltd. bought More Than Free Co., Ltd., expected income is estimated below 10 million Baht, or less than 1% of overall earnings.

The company is considering further investment funding. The duty free zone in Samui airport, which is owned by the company, will be allocated an investment budget towards renovations for 100 sqm., and for the new duty free zone if it wins the bid.

Mr. Nitinai Sirismatthakarn, President of Airports of Thailand Public Company Limited (AOT), has commented about the prospects of the 2H/2018 share prices that he is confident that the number of passengers will continue to grow according to the set goals of 9-10%, even though in July, growths reached only 4.5% from previous growths of 8-9%. Assessments are being made in to the cause of the downturn, whether it was due to impacts from the capsized boat accident in Phuket or a drop from tourists going to Russia for the World Cup. However, the situation is believed to be a short-term effect only.

AOT’s income is expected to have greater growth than that of passenger numbers at 9-10% from the increase of international flights in relation to domestic flights, and from the International Civil Aviation Organization’s (ICAO) lift of its red flag on Thailand, along with the resolution of the Zero-Dollar tours problem.

Progress in finding a new duty free zone operator is expected during July – August, as the TOR will most likely be drafted, and the new operator will be selected at year’s end according to the company’s plan in selecting a new operator 2 years before the contract expires in September, 2020.   

Headway for the consignment of 4 airports, Udon Thani airport, Sakon Nakhon airport, Chumphon airport, and Tak airport, is expected to be completed by June, 2019. While the 2 new airports to be built, Chiang Mai’s 2nd airport, and Phang-Nga airport are expected to be submitted to the cabinet within July – August, and if passed by the cabinet, property for construction will be sought for immediately. The construction will take 4 years after the property has been acquired.  

KT ZMICO SECURITIES Co.,Ltd. gives neutral rating in relation to prospects from the disclosure due to the fact that everything is still in the processing stage. BA’s strategy is sound because it