Wednesday 31 October 2012

Tiger Airways

OCBC on 30 Oct 2012

Tiger Airways’s (TGR) 2Q13 results came in below expectations. Revenue rose by 78.9% YoY to S$196.7m while its net loss narrowed to S$18.3m, from S$49.9m a year ago following an increase in services from Tiger Australia to pre-suspension levels. In a separate announcement, TGR announced the proposed divestment of 60% of Tiger Australia to Virgin Australia and the entering of a joint venture between both parties to manage Tiger Australia. The move will allow TGR to dispose a substantial chunk of the loss making entity whilst allowing it to retain a presence in Australia and leverage off Virgin’s 30% domestic market share. In a related move, SIA – the parent company of TGR – will invest a 10% stake in Virgin Australia, which will help counteract Qantas’s ambitions of competing within the Asia-Pacific premium market by shifting focus back onto the domestic Australian market. Although our 2H13 estimates point to a modest return to profitability for TGR, a potential downside risk lies in higher associate losses in the second half. Maintain our HOLD rating with an unchanged 2.9x P/B derived valuation of S$0.81.

Loss narrows further
Tiger Airways (TGR) 2Q13 financial results came in below expectations as we were anticipating a small net profit instead of another loss-making quarter. TGR’s 2Q13 revenue rose by 78.9% YoY to S$196.7m while its net loss narrowed to S$18.3m, from S$49.9m a year ago. In terms of its segments, Tiger Singapore continued to perform well with revenue outpacing increases in operating costs (+14.4% YoY to S$128m) but Tiger Australia remained weak despite registering a lower operating loss of S$20.0m for 2Q13 (2Q12: -S$27.2m). 

Divestment of Tiger Australia
In a separate announcement, which we view positively, TGR announced the proposed divestment of 60% of Tiger Australia to Virgin Australia and the entering of a joint venture between both parties to manage Tiger Australia. The deal (worth a potential S$119.8m gain for TGR) will allow TGR to dispose a substantial chunk of the loss making entity whilst allowing it to retain participation in Australia’s domestic market. 

Competition heats up in Australia
Virgin Australia also announced that it is planning a A$98.7m takeover offer for Skywest Airlines, a regional carrier in Western Australia, which will give it access to any increases in travel and charter flights related to the mining boom. To round off the hat-trick of deals, SIA will take up 10% of Virgin for A$105m as it attempts to counteract Qantas’s ambitions of competing within the Asia-Pacific premium market by shifting focus back onto the domestic Australian market.

Maintain HOLD on potential losses from associates
Incorporating the potential one-time gain of S$119.8m from the 60% sale, we adjust our FY13 projections accordingly. Nonetheless, excluding this gain, our second half estimates point to a modest return to profitability for TGR as we envision strong 2H13 revenue growth from the traditional peak season travel months and jet fuel prices to sustain at current levels. However, any unexpected increase in losses from TGR’s associate airlines could derail TGR’s recovery process. In light of this probable outcome, we maintain our HOLD rating with an unchanged 2.9x P/B derived valuation of S$0.81.

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