We downgrade our 3-month tactical call on AOT to Neutral (from Outperform). AOT’s share price fell 14% DoD to its lowest since March 2022 due to measures to assist concessionaires, raising concerns about their financial health and ability to pay future concession charges, especially key concessionaire King Power. We feel this will continue to pressure share price until concessionaires’ payment ability improves and the measure ends. Our new end-2025 DCF TP is Bt57 (down from Bt72) to reflect the worst case of lower concession revenue and operational uncertainty.
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AOT - Concern on concessionaires’ financial health. Downgrade to Neutral.
Event: At an analyst meeting on Friday, AOT revealed a measure to assist concessionaires with liquidity issues. King Power (AOT’s key concessionaire for duty-free and retail space) owes ~Bt4.0bn (of a total ~Bt5.0bn) in overdue MG charges from August 2024–February 2025. AOT will extend payments for 18 months, with a bank guarantee and a penalty rate of 18%, to be reduced to MLR+2%.
Our view: While AOT itself is financially healthy, the return of assistance measures (Figure 1) raises concerns about concessionaires' financial stability and ability to pay future concession charges, particularly King Power. King Power's minimum guarantee (MG) charge for new concessions, awarded before COVID-19 and covering April 1, 2023–March 31, 2033, has risen significantly. For the key duty-free concession at Suvarnabhumi Airport, the current MG per international passenger is Bt168, compared to Bt100 actual charge in FY2019 (Figure 2). Concessions are crucial to AOT, accounting for 32% of its revenue and contributing significantly to earnings due to high margins.
We view the market is worried about a worst-case scenario where King Power cannot pay the high MG on existing concessions, which may require AOT to set aside provisions. There is also the chance the MG charge will be amended or the existing concessions terminated, opening a new bidding process, potentially resulting in lower concession revenue. Our sensitivity analysis (Figure 3) suggests that if King Power’s MG charge in FY2025 is reduced to the actual FY2019 level, AOT's concession revenue in FY2025 would fall to FY2019 levels, with future growth based on passenger growth. This implies 8-9% revenue downside and 13-21% core earnings impact in FY2025-33.
Our recommendation: We downgrade our 3-month tactical call to Neutral (from Outperform). Despite a 14% DoD share price drop suggesting negatives are in the price, concerns about concessionaires' financial health persist and will continue depress price performance, in our view.
We keep our earnings projection unchanged, since AOT’s revenue recognition is unchanged and it has not yet made any provisions for this assistance, given that the concessionaire has bank guarantee. However, we lower our valuation and derive an end-2025 DCF TP of Bt57 (from Bt72). Our reduction of Bt15/share consists of: 1) Bt10/share to reflect the worst case that King Power cannot pay the high MG under the existing concessions and AOT’s concession revenue will be cut and 2) Bt5/share to reflect operational uncertainty as we raise WACC to 7.9% (from 7.5%) (Figure 4).
Catalysts include improved clarity on concessionaires’ payment abilities over the next 18 months and AOT revealed that in March 2025, King Power will resume normal MG payments, which is a point to monitor, and a potential PSC hike expected in July 2025. We see accumulation opportunities below Bt39.5/share.
Risks. Global economic slowdowns that will cut travel demand and concessionaires’ financial health that will impact AOT’s concession revenue. We see ESG risks as environmental issues (E) and social issues such as safety (S).