Tigerair

UOBKayhian on 27 Jan 2015

FY15F PE (x): n.m.
FY16F PE (x): 11.9

Higher fares and a cut in capacity lead to recovery. Improvement in earnings came from pricing power as Tigerair cut capacity by 5.7% yoy in 3QFY15. Opex only declined by 1.5% due to fuel hedging losses, exchange losses, higher lease costs and maintenance costs. Future capacity growth would be dependant on the ability to grow traffic rather than manage capacity. Good pricing power but “not out of the woods”. The improvement in average fares was a major surprise in 3Q14. However, it is too early to assume a return to pricing power. Arch rival, Airasia has raised the ante by removing surcharges, which could somewhat curtain Tigerair’s pricing power. Still, the recent airline disasters could have Tigerair benefitting at the expense of rivals. Upgrade to HOLD. Tigerair now operates a cleaner balance sheet and has demonstrated pricing power, but we are unsure to what extent that it can be maintained. It is also worth bearing in mind that improved earnings came amid declining pax traffic. We had previously valued Tigerair at 1x P/B. We now value Tigerair on a PE basis and accord the airline a 12x PE multiple, a 20% premium to Airasia’s valuation. Our target price is raised by 30% to $S0.34. Recommended entry price $S0.29.