Bangkok Airways launches IPO amid turbulence

Thai airline hopes investors will sign up to an attractive valuation and turnaround in the domestic tourism industry.

Formal terms for an initial public offering by Bangkok Airways were fixed on Monday, with Thailand’s fourth largest carrier hoping to raise between Bt16.79 billion and Bt19.71 billion ($510 million and $604 million). 

The 730 million share deal has a price range of Bt23 to Bt27 per share and a split of 520 million primary shares (24.8% of enlarged), plus 105 million secondary shares (5% of enlarged) and a further 105 million shares (5% of enlarged).

The first tranche of secondary shares are being divested by a member of the controlling family, Paramaporn Prasarttong-Osoth, and will be sold during the first day of trading. The second tranche of shares are being sold concurrent to the offering as a strategic stake to Bangkok Bank.

In total, the company will issue 37.3% of its enlarged share capital. For the initial allocation of 520 million primary shares, the leads will place up to 200 million shares with international institutions, 121.5 million with domestic institutions and 198.5 million with domestic retail investors.

The deal is being led by Bualuang Securities, Citigroup, Credit Suisse and DBS. Having completed roadshows in Bangkok, the management will move to Singapore on October 10 and then to Hong Kong on October 14.  

Pricing is scheduled for October 17, with listing on November 3.

Bangkok Airways is the last of Thailand’s major carriers to go public even though it was the country’s first private sector airline to be established in 1968. National flag carrier Thai Airways listed in 1992, followed by its Low Cost Carrier (LCC) Nok Air in 2013 and Thai AirAsia, a subsidiary of Malaysia’s AirAsia, in 2012.

Valuing Bangkok Airways

Valuing airlines on a P/E basis is often difficult because their earnings are so volatile and there is often plenty of clear water between individual analyst’s forecasts. In Thailand’s case there is the added complication of the fluid political situation and military coup, which makes forecasting even more speculative then normal.

Syndicate banks say they are also valuing Bangkok Airways on an EV/Ebitda basis because the group has a diversified asset base, which accounts for a significant chunk of shareholders’ equity, but far less in terms of earnings. 

The group owns stakes in listed entities Bangkok Dusit Medical Services and Samui Property Fund alongside its core airline operations. Both stakes have been marked to market, but do not flow through to the P&L so there has consequently been a big boost to shareholders’ equity as Bangkok Dusit has risen 53% since the beginning of the year.

Based on Bangkok Dusit Medical Services current share price of Bt18, the group’s 7.83% stake is worth $601 million including a 10% holding discount, while its 25% stake in Samui Property Fund is worth $112 million based on a Bt17.2 share price and similar 10% discount.

On a fair value basis, the group core airline operations have an equity value of roughly $670 million to $870 million (pre-money), which means the Bangkok Dusit stake accounts for about 40% of the overall equity value at the mid-point of the range.

Based on projected 2015 Ebitda of around $200 million, the group is being marketed on an EV/Ebitda range of 4.6 to 5.5 times. This compares to a fair value range of about 6 to 7.2 times.

At this level, Bangkok Airways is being pitched at a discount to all of its nearest comparables. Thai Airways is currently trading at 8.7 times 2015 EV/Ebitda, while Nok Air is valued at 21.5 times and AirAsia, which is quoted as Asia Aviation, at 24.6 times.

Further afield, Thai AirAsia’s parent, AirAsia Berhad is trading at 7.5 times, while its long-haul budget airline AsiaAsia X is at 20.6 times. Singaporean LCC Tiger Airways is at 14.9 times.

LCC’s typically trade a premium to national flag carriers particularly in the early stages of their existence when they have a higher growth profile. In Thailand, this valuation gap has been further compounded by the multiple problems afflicting Thai Airways, which is currently in the process of being restructured and is overseen by the military.

However, the extremely high multiples Nok Air and AirAsia currently command reflect problems surrounding the industry rather than an exceptionally strong growth profile.

Thanks to Thailand’s political turmoil, all three listed airlines saw their share prices plummet last October - halving in the space of three months. Since the beginning of the year, Thai Airways and Asia Aviation have both re-bounded by 0.7% and 21.3%, while Nok has continued to fall, down 22%.

Asia Aviation has mirrored the SET Index, which has been one of Asia’s best performing indices year-to-date. It closed Monday at 1543.13, up 19.07% so far this year.

However, in line with other global equity markets it has lost momentum in recent weeks, falling 3.5% since September 26. The benchmark index is currently trading at around 16 times 2015 earnings and one key factor for investors will not only be whether the market turns positive again, but if it does, how much upside is still left?

IPO offers play on tourism revival

Bangkok Airways is not being pitched as an LCC, but as a boutique airline and a defensive play, with a more diversified asset base than competitors. The group is particularly geared to a turnaround in the tourism industry given that 43% its available seats per kilometer (ASK) are international. 

In the first half of 2014, the airline recorded ASK’s of 2,726.9 of which 1,547 were domestic and 1,180 international.

In particular, Bangkok Airways has an almost complete lock on airline access to one of the country’s leading tourist destinations, Koh Samui. It operates around 90% of flights in and out of the island, as well as running the airport.

In 2006, it leased the airport and its facilities to Samui Property Fund for 30 years for Bt9.3 billion. Since then, it has leased it back under a renewable three-year sub lease agreement, recording it as a long-term loan in its accounts.

Ko Samui is the key to the group since it accounted for 51% of revenues in 2013. Last year, the airport handled 1.8 million passengers, but has capacity for up to six million.

It is hoping Thailand’s Department of Civil Aviation will soon approve an increase in daily flights from 36 to 50.

Key to securing interest in the IPO will be persuading investors that international tourists are starting to come back and the flotation provides a good entry point to play the turnaround.

During the first half of the year, the ongoing political problems led to a severe drop-off in visitors. Inbound visitors from East Asia, for example, were down 18%.

Tourist arrivals are showing signs of picking up again, with the number jumping from 1.5 million in June to 1.9 million in July and two million in August. However, they were still down 11% year-on-year for the first eight months of 2014.

Some 50 countries still have travel advisories warning tourists to exercise caution when visiting the country. The removal of some of these warnings will be crucial for earnings over the next two quarters given the looming peak booking season from December to March.

Should this materialize, Bangkok Airways will also be the biggest beneficiaries of Thai Airways decision to move its second LCC, Thai Smile, from Suvarnabhumi international airport to Don Muang airport.  All of the LCCs are now based at Don Muang, which domestic passengers typically prefer because it is closer to Bangkok than the international airport.

However, the departure of Thai Smile means Bangkok Airways is likely to pick up many of the connecting passengers arriving on international flights for domestic destinations.

Overcapacity on domestic routes

Domestic passenger growth has a very strong correlation to GDP, making Bangkok Airways and the other LCC’s good proxies for consumer spending, albeit with a discounted valuation to account for their more volatile earnings stream.

According to AOT data, domestic passengers numbers rose 32% in the first seven months to 8.3 million. But the airlines have not been able to capitalize on this increase because capacity expansion and the entrance of new players is vastly outstripping passenger growth and spending.

Thai Lion Air, a subsidiary of Indonesia’s Lion Group, began operations in December 2013. According to airline analysts CAPA it has already captured 8% of the domestic market.

Later this year, Thai VietJet Air plans to start operations, while Thai AirAsia X is now flying to Korea and Japan.

Red ink for airlines’ second quarter earnings

These factors led all the airlines to report losses during the second quarter, although they all now believe earnings are on the turn.

Bangkok Airways reported a net loss of Bt47.4 million in 2013 and analysts forecast it will also report another loss of Bt25 million in 2014 before returning to profitability in 2015. In 2013, revenues totaled Bt19.88 billion, of which airline revenues accounted for Bt16.73 billion.

In the first half of this year, the airline reported revenues of Bt10.43 billion, up 6.9% year-on-year. Core airline earnings accounted for Bt8.67 billion of the total.

ASK’s were also up 43%, but the average load factor (passengers as a percentage of seat capacity) fell 4.1% to 65.8% because RPK (revenue per passenger) rose by a lesser 34% to Bt1.8 billion.

The biggest drop in the airline’s load factor resulted from fewer passengers on its domestic flights. The airline has a 14% market share domestically and the load ratio fell from 78.4% in the first half of 2013 to 70.1% in the first half of 2014.

The international load factor remained static at 59.6% over the same period.

Thai AirAsia, the country’s largest LCC, has similarly struggled with operating costs outstripping revenue increases – 21% increase in the former compared to a 2% improvement in the latter. It reported a second quarter loss of Bt318 billion compared to Bt499 billion during the same period in 2013.

The airline’s load factor dropped four basis points to 78%. Passenger numbers were up 16%, but so too was seat capacity, which increased by 23%.

Increasing competition meant that average fares for its 2.8 million passengers fell 14%. Thai AirAsia has a 28% share of the domestic market.

Nok Airlines, meanwhile, has 27% domestic market share. It too recorded a second quarter loss of Bt160 million compared to a profit of Bt260 million a year earlier.

Revenues rose 8% to Bt2.83 billion, but operating costs were up 28% to Bt2.99 billion.

During the second quarter, NOK reported a load factor of 77.7% down from an 85% average in 2013.  Management guided that it should rise back to 80% during the third quarter and believe the carrier will be profitable again by the fourth quarter.

The carrier also saw average fares drop 14% because of aggressive discounting to deal with increasing competition. It has a 27% domestic market share

To date, the carrier has been a purely domestic operator. However, this will change in November when it starts flying two international routes to Korea and Japan as NokScoot in a joint venture with Singapore Airlines.

Thai Airways recorded the biggest losses of the country’s listed airlines. Its second quarter loss came in at Bt7.65 billion and its load factor dropped to 63.5%.

Analysts remain divided over when it will return to profitability.  It currently has a 22% share of the domestic market according to CAPA figures.

A major factor for all the airlines are FX movements given that roughly 63% of costs are US-dollar denominated, while revenues are largely Baht-denominated.  The problem is most acute for the LCC’s, which are far more dependent on domestic earnings.

Airlines typically hedge about 60% of their fuel costs and Bangkok Airways is no exception. However, it does benefit from the fact that only 30% of its costs are dollar-denominated (almost exclusively for jet fuel), while 51% of its revenues are foreign currency.

Bangkok Airways key facts

Bangkok Airways flies to 23 destinations in 10 countries. It also has code-sharing agreements covering eight international destinations in five cities and these accounted for 18.5% of revenues during the first half of the year.

The airline has a fleet of 25 planes comprising eight ATR’s, seven A320’s and 10 A319’s. By 2018, it plans to increase its fleet of 45 aircraft, with deliveries front-loaded in 2015 and 2015 when 14 aircraft are due.


This story was updated after first publication

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