Tiger Airways

DMG & PARTNERS RESEARCH on 31 Oct 2012

TIGER Airways reported Q2 2013 net loss of $18 million, in line with expectations.

Revenue rose 79 per cent y-o-y to $197 million on the back of increased capacity (up 42.1 per cent), stronger yields (up 21.2 per cent) and higher load factor (up 2.9 percentage points).

For H1 2013, net loss narrowed to $32 million.

The group has proposed the sale of a 60 per cent stake in Tiger Australia to Virgin Australia for a cash sum of A$35 million (S$44 million).

The estimated gain from the deal is $120 million and we have assumed it will be completed in end-FY2013.

We are positive on the sale, given that it will help strengthen the group's footing in Australia. We believe the price paid by Virgin to be fair, given Tiger Australia's book value was a negative $222 million in September 2012.

We upgrade the stock from a "neutral" to a "buy" with a new higher target price of 85 cents pegged at 1.8x FY14F P/B, which implies a target FY2014F PE of 13.5x.

Tiger Australia reported narrowing operating losses of $20 million for the quarter, which is $7 million lower than the previous corresponding period, where it was operating on a restricted basis. Tiger Singapore registered an operating profit of $5 million, which is a turnaround from an operating loss of $12 million in Q2 2012.

Tiger Australia aims to increase its fleet size from current 11 to 35 in five years. Eight new A320s will come from Tiger's existing order book.

Both Tiger and Virgin have committed A$63 million to Tiger Australia for the first five years. In addition to the cash sum of A$35 million, there will be a A$5 million deferred payment, which is subject to certain performance milestones being met.

Finally, Tiger Australia will be paying Tiger Airways a licensing fee to use its brand for the next 20 years.

Competitive pressures make sense for collaboration. Intense competitive pressure in Australia has compressed yields, which is why Tiger and Virgin are collaborating in a market largely dominated by Qantas.

Virgin was previously in the low-cost carrier (LCC) space but withdrew. This deal will pave the way for it to re-enter the LCC segment with Tiger which commands about 7 per cent of the domestic market share.
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