Tiger Airways

OCBC on 22 Jul 2015

Tiger Airways (Tigerair) 1QFY16 results saw its core net loss narrow by 88.8% YoY to S$1.7m as operating expenses dropped 10.8% to S$167.7m. Specifically, lower fuel, staff and airport and handling expenses were the main contributors to the drop in expenses. For Tigerair’s top line, 1QFY16 revenue declined 2.0% YoY to S$168.3m as Tigerair rationalized capacity with a 7.2% reduction but this was mitigated by a 4.7% improvement in yields driven by network rationalisation. Overcapacity is likely to persist and plague Southeast Asia’s airline industry as the two biggest Low Cost Carriers (LCCs), AirAsia and Lion Air, are expected to further expand their capacity over the next few years. Overcapacity translates to downward pressures on yields. That said, we still think lower lower jet fuel costs will help mitigate impact from the competitive business environment ahead. Incorporating 1QFY16 results and given the uncertain outlook, we cut our FY16F PATMI by 4.9%. Consequently, our FV drops from S$0.30 to S$0.29 (8.0x FY16F EV/EBITDA). Maintain SELL.

Lower fuel costs helped narrow 1QFY16 core net loss
Tiger Airways (Tigerair) 1QFY16 results saw its core net loss narrow by 88.8% YoY to S$1.7m as operating expenses dropped 10.8% to S$167.7m. Specifically, lower fuel, staff and airport and handling expenses were the main contributors to the drop in expenses. However, these declines were partially offset by a S$4.1m increase arising from changes in accounting estimates for maintenance provisions and aircraft depreciation policy. For Tigerair’s top line, 1QFY16 revenue declined 2.0% YoY to S$168.3m as Tigerair rationalized capacity with a 7.2% reduction, but this was mitigated by a 4.7% improvement in yields driven by network rationalisation, as well as higher lease income from sublease of aircraft to Tigerair Australia and Taiwan. This set of results did not come as a surprise to us, since lower fuel costs and absence of one-off restructuring costs were within our expectations.

Overcapacity to persist but declining jet fuel cost helps
Overcapacity is likely to persist and plague Southeast Asia’s airline industry as the two biggest Low Cost Carriers (LCCs), AirAsia and Lion Air, are expected to further expand their capacity over the next few years. Overcapacity translates to downward pressures on yields. While Tigerair saw recovery in its yields for 1QFY16, its load factor saw YoY decline of 1.2ppt for the period. That said, we still think lower jet fuel costs will help mitigate impact from the competitive business environment ahead. With an average hedging exposure of 40%, we forecast Tigerair to be 65%, 55%, 40%, 25% and 15% hedged for each quarter from 2QFY16 to 2QFY17, at the disclosed average hedged price of US$87/barrel.

Progress made but turnaround still far; maintain SELL
Tigerair’s stated collaboration with Scoot saw good progress over the period but management reiterated that much more can be done. Incorporating 1QFY16 results and given the uncertain outlook, we cut our FY16F PATMI by 4.9%. Consequently, our FV drops from S$0.30 to S$0.29 (8.0x FY16F EV/EBITDA). Maintain SELL rating on Tigerair.

Aviation & Shipping Sectors

OCBC on 26 May 2015

Weak performances persisted into 1QCY15 for most of the companies within the aviation and shipping sectors. Large hedging losses continued to erode fuel savings for the airlines while the engineering service providers are also facing structural issues arising from improved airworthiness of aircraft/engines. Freight rates in the shipping sector were also muted through the period. Once again, overcapacity in both airline and shipping industry is expected to persist with more capacity to be added in CY15, which will put downward pressures on passenger yields and freight rates. Furthermore, moderate global economic growth is likely to cast uncertainties over air travel demand and trade volume. Hence, on these grounds, we maintain our UNDERWEIGHT rating on both the Aviation and Shipping sectors, with ratings on SIA [HOLD; FV:S$11.59], Tigerair [SELL; FV:S$0.30], SIAEC [SELL; FV:S$3.45], STE [HOLD; FV:S$3.33], SATS [HOLD; FV:S$3.11], NOL [HOLD; FV:S$1.15].

Review of 1QCY15 results
The airlines’ results came in mostly disappointing: 1) Singapore Airlines’ (SIA) [HOLD; FV: S$11.59] FY15 results were below expectations, as PATMI fell 16% to S$333.4m on weaker contributions from JVs and associates, as well as large hedging losses, and 2) Tiger Airways (Tigerair) [SELL; FV: S$0.30] saw a year of restructuring in FY15 as it continued to downsize operations but overcapacity and weak yields still led to core net loss of S$72.5m. The performances from aviation service providers were more mixed: 1) ST Engineering’s (STE) [HOLD; FV: S$3.33] 1Q15 results came in within expectations as core earnings slipped 2.2% YoY to S$142.9m as revenue from most segments saw decline, 2) SIA Engineering Company’s (SIAEC) [SELL; FV: S$3.45] FY15 results slightly missed our expectations as PATMI plunged 31.0% to S$183.3m on fewer aircraft/engines workshop visits, but 3) SATS Ltd’s (SATS) [HOLD; FV: S$3.11] FY15 results were above our expectations as PATMI grew 7.0% to S$195.9m on disciplined cost management and better business mix. Lastly, for shipping, Neptune Orient Lines’ (NOL) [HOLD; FV: S$1.15] 1Q15 results improved as net loss from continuing business dropped 71% to US$36m on cost savings driven by tight cost control and better operational efficiency but weak freight rates persisted.

Maintain UNDERWEIGHT on Aviation Sector
In our view, the airline industry continues to be plagued by overcapacity in the region as capacity is expected to increase over the next two years. Also, outlook for air travel demand is unlikely to be rosy after IMF in Apr-15 maintained its world economic growth forecasts for CY15 and CY16 at 3.5% and 3.8%, respectively. Furthermore, Thailand’s aviation sector came under fire after serious safety issues surfaced from the audit conducted by UN’s International Civil Aviation Organisation (ICAO). Consequently, it is logical to deduce that the service providers are likely to see tough times ahead too. On these reasons, we maintain UNDERWEIGHT on the Aviation Sector.

Maintain UNDERWEIGHT on Shipping Sector
Even though port congestion in the U.S. West Coast (USWC) is easing after tentative labour agreement had been reached, we think overcapacity issue is unlikely to ease in the near-term with more vessel deliveries expected this year. While the Transpacific Stabilisation Agreement (TSA) has recommended minimum contract rates on transpacific routes, we think any recovery is too early to tell, especially when IMF cut its world trade volume forecasts for CY15 and CY16 by 0.1% and 0.6% to 3.7% and 4.7%, respectively. Hence, we maintain UNDERWEIGHT on the Shipping Sector.

Tiger Airways

OCBC on 6 May 2015

Tiger Airways (Tigerair) 4QFY15 results saw its net loss narrow by 80.3% YoY to S$18.8m on the back of a 5.0% growth in revenue to S$172.2m driven by better yields and load factor. However, as Tigerair continues its restructuring efforts, 4QFY15 continues to see one-off charges, as it also made changes to its accounting policies. For FY15, Tigerair’s net loss grew 18.5% to S$264.2m resulting from the many one-off charges recorded throughout the year. With the airline industry is expected to remain challenging on overcapacity in the region, we think the improved fuel hedging positions will benefit Tigerair over the next two years. While the effort to collaborate with SIA group is making progress, we think Tigerair’s turnaround still has some way to go with slow recovery expected over the next two years. We reiterate our SELL rating but increase our FV marginally from S$0.29 to S$0.30 (8.0x FY16F EV/EBITDA) on cheaper jet fuel assumptions.

4QFY15 continues to see one-off charges
Tiger Airways (Tigerair) 4QFY15 results saw its net loss narrow by 80.3% YoY to S$18.8m on the back of a 5.0% growth in revenue to S$172.2m driven by better yields and load factor. As part of management’s restructuring efforts to turnaround Tigerair, 4QFY15 continues to see one-off charges such as: 1) S$10.8m on maintenance charges from prior years on accounting policies changes (refer to page 2), and 2) estimated loss of S$17.5m on planned disposal of two aircraft. We also estimate for increases in depreciation and maintenance expenses of ~S$13.5m and S$2.0m per annum to recur going forward. For FY15, Tigerair’s net loss grew 18.5% to S$264.2m resulting from the many one-off charges recorded throughout the year. However, excluding exceptional items, core net loss of S$72.5m were within our expectation of S$71.8m.

Hedging positions improve as expensive contracts expire
The airline industry is expected to remain challenging on overcapacity in the region, with capacity expected to grow ~13% in 2015, according to Centre for Aviation. Even though Tigerair registered strong recovery in yield and load factor in 4QFY15 (refer to page 3), overcapacity issue translates to uncertainty of yield going forward. However, we think lower jet fuel costs will benefit Tigerair with higher savings as its hedging positions improve on expiry of the older and more expensive contracts. Accordingly, we update our assumptions with its new hedging positions as at 31-Mar-15. With an average hedging exposure of 40%, we forecast Tigerair to be 65%, 55%, 40%, 25% and 15% hedged for each quarter from 1QFY16 to 1QFY17, at the disclosed average hedged price of US$94.42/barrel. 

Maintain SELL
While the effort to collaborate with SIA group is making progress, we think Tigerair’s turnaround still has some way to go with slow recovery expected over the next two years. We reiterate our SELL rating but increase our FV marginally from S$0.29 to S$0.30 (8.0x FY16F EV/EBITDA) on cheaper jet fuel assumptions.

Tiger Airways

OCBC on 17 Mar 2015

Tiger Airways (Tigerair) showed strong discipline in capacity management as it reported a 4.3 ppt YoY increase in its Feb-15 passenger load factor (PLF) to 78.9%. Feb-15 was the eighth consecutive month that Tigerair showed YoY improvement in its PLF, indicating consistent efforts put in to manage capacity. . However, we still think there are much more to be done for Tigerair’s turnaround through the alliance with Scoot. The uncertainty over air travel demand from the expected slowdown in global economy also gives us a good reason to remain cautious on near-term outlook. Looking ahead, at least until end-FY16, we think Tigerair will benefit from the lower jet fuel costs given its hedging exposure. We updated our model and as a result, our projection for FY16 forecast improves from net loss of S$0.7m to net profit of S$50.6m. While the Scoot-Tigerair alliance is making good progress, we think Tigerair’s turnaround still has some way to go. With uncertain near-term outlook, and the recent run-up in share price likely overdone, we reiterate SELL, even as our FV increases from S$0.23 to S$0.29 (8.0x FY16F EV/EBITDA).

Outlook remains uncertain 
Tiger Airways (Tigerair) showed strong discipline in capacity management as it reported a 4.3 ppt YoY increase in its Feb-15 passenger load factor (PLF) to 78.9%. Feb-15 was the eighth consecutive month that Tigerair showed YoY improvement in its PLF, indicating consistent efforts put in to manage capacity. We believe the encouraging operating statistics shown over the past few months are sustainable with management likely to continue to focus on capacity management as part of its turnaround strategy. However, we still think there are much more to be done for Tigerair’s turnaround through the alliance with Scoot to capture interlining traffic growth. The uncertainty of air travel demand from the expected slowdown in global economy also gives us a good reason to remain cautious over Tigerair’s near-term outlook. Note that Tigerair saw four consecutive quarters of YoY decline in its passenger volume.

Cheaper fuel lifts FY16 PATMI forecast
Looking ahead, at least until end-FY16, we think Tigerair will benefit from the lower jet fuel costs given its hedging exposure. With Brent crude price fluctuating around the US$60/barrel range for the past one month, we updated our model with the assumption that jet fuel price for FY16 to be US$75/barrel, implying a crack spread of US$15/barrel. Similar to Singapore Airlines hedging policy, we think Tigerair also hedged on a declining wedge basis. On this rationale, with an average hedging exposure of 35%, we forecast Tigerair to be 55%, 50%, 40%, 20% and 10% hedged on jet fuel for each quarter from 4QFY15 to 4QFY16, respectively, at an average price of US$111.68/barrel. As a result, our projection for FY16 forecast improves from net loss of S$0.7m to net profit of S$50.6m.

Raise FV; maintain SELL
While the Scoot-Tigerair alliance is making good progress, we think Tigerair’s turnaround still has some way to go. With the uncertain near-term outlook, and the recent run-up in share price likely overdone, we reiterate SELL, even as our FV increases from S$0.23 to S$0.29 (8.0x FY16F EV/EBITDA) on cheaper jet fuel.

Tiger Airways

OCBC on 27 Jan 2015

Tiger Airways (Tigerair) finally turned profitable after several consecutive quarters of losses. Its 3QFY15 revenue increased 5.9% YoY to S$182.3m while expenses saw 1.5% decline to S$178.2m, largely due to improvement in yield, capacity rationalization as well as lower fuel and staff costs. This led to a positive PATMI of S$2.2m for 3QFY15 compared to net loss of S$118.5m in 3QFY14. We believe the longer-term success of Tigerair hinges on driving growth and managing costs through the alliance with Scoot as well as Singapore Airlines (SIA). However, we remain cautious on the outlook of Tigerair as one profitable quarter does not guarantee the success of its turnaround strategy. We prefer to wait and see if these improvements can be sustained. Factoring in the results and updated outlook, our FY15F/16F net losses narrow from S$255.3m/S$1.4m to S$246.6m/S$0.7m. Our fair value consequently increases from S$0.18 to S$0.23. We think the 23% share price spike yesterday was overdone, maintain SELL.

Finally profitable after consecutive quarters of losses 
Tiger Airways (Tigerair) finally turned profitable after several consecutive quarters of losses. Its 3QFY15 revenue increased 5.9% YoY to S$182.3m while expenses saw 1.5% decline to S$178.2m, largely due to improvement in yield, capacity rationalization as well as lower fuel and staff costs. This led to a positive PATMI of S$2.2m for 3QFY15 compared to net loss of S$118.5m in 3QFY14. For 9MFY15 results, its revenue dropped 13.0% to S$498.0m while expenses declined 10.7% to S$535.6m mainly due to exclusion of Tigerair Australia as a subsidiary since 2QFY14. Excluding one-off items, its 9MFY15 recorded S$71.1m loss, which is a 27.9% improvement from S$98.6m core net loss in 9MFY14.

Alliance with Scoot and SIA key for turnaround success
The restructuring efforts by Tigerair’s management seem to be taking off as consolidation of its business to focus on Singapore operations saw its 3QFY15 passenger yield improved 4.9% YoY while load factor recorded 6.2ppt growth. Management stated they will focus on capacity rationalization to sustain the YoY improvements in yields but cautioned against uncertainties in the macro environment where competition in the region remains intense. We believe the longer-term success of Tigerair hinges on driving growth and managing costs through the alliance with Scoot as well as with its parent, Singapore Airlines Limited (SIA). While the key idea to capture interlining passenger traffic between Tigerair and Scoot through coordination of connecting flights, slot timings at Changi Airport are generally granted semi-annually for each route. As such, we expect impact on passenger traffic growth to materialize gradually only from 2HFY16 onwards. 

Remain cautious; maintain SELL
We remain cautious on the outlook of Tigerair as one profitable quarter does not guarantee the success of its turnaround strategy. We prefer to wait and see if these improvements can be sustained. Factoring in the results and updated outlook, our FY15F/16F net losses narrow from S$255.3m/S$1.4m to S$246.6m/S$0.7m. Our FV consequently increases from S$0.18 to S$0.23. We think the 23% share price spike yesterday was overdone, maintain SELL.

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.

Tiger Airways Holdings

OCBC on 8 Jan 2015

In a bid to repair its balance sheet, Tiger Airways Holdings’ (Tigerair) did a rights issue exercise, which closed on 29-Dec-14, and was fully subscribed with total valid acceptances and excess applications received representing 156.7% of the 1,147,102,770 rights shares available for issuance. Post the rights issue, as FY15F’s book value strengthens from S$15.9m to S$242.4m, as its share base increases to a total of 2,496,635,441 ordinary shares. The stronger balance sheet and cash balance will help Tigerair in its turnaround strategy through alliance with Scoot, which we expect to see impact from at least 2HFY16 onwards. In the near-term, declining oil prices will help in improving profitability. However, we think the depressed yields due to overcapacity in the region will continue to mute its earnings in 2015, negating the effects of lower oil prices. Factoring in both positive and negative factors on lower oil prices and depressed yields in FY16, respectively, our FY16F net loss narrows from S$6m to S$1.4m. With the larger share base from its rights issue, our fair value consequently decreases slightly from S$0.21 to S$0.18. With a still-muted outlook on the aviation sector in 2015, maintain SELL.

Balance sheet strengthened with rights issue
Following numerous consecutive quarters of losses and large provisions charged to 2QFY15 results, Tiger Airways Holdings’ (Tigerair) book value declined to low double-digit level. This led to a rights issue by Tigerair to repair its balance sheet in a bid to carry out its turnaround strategy. The rights issue, which closed on 29-Dec-14, was fully subscribed with total valid acceptances and excess applications received representing 156.7% of the 1,147,102,770 rights shares available for issuance. SIA’s stake remains at 55.8% based on the enlarged issued share capital of Tigerair of 2,496,635,441 shares post the rights issue, as FY15F’s book value strengthens from S$15.9m to S$242.4m.

Lower oil prices to help but turnaround in the near-term unlikely
After shedding all its overseas ventures, Tigerair’s turnaround strategy focuses on growth through a partnership with Scoot to capture interlining traffic between Tigerair and Scoot’s routes. While we previously forecasted the cooperation to begin as early as from 1QFY16, we think a more realistic target is from 2HFY16 onwards instead. In order to maximise the synergies between Tigerair and Scoot’s routes, the connecting flight timings must be attractive and changing them requires approval from the relevant authorities which is time-consuming. In the near-term, declining oil prices will help in improving profitability. We performed regression analysis based on the past 22 quarters’ data to determine the correlation between Tigerair’s jet fuel cost and contract price for Singapore Jet Kerosene Swap Futures, which is used to estimate Tigerair’s FY16 jet fuel cost as we revised our assumption of jet fuel price from US$115/barrel to US$100/barrel. However, we think the depressed yields from overcapacity in the region will still mute its earnings, at least in 2015, negating the effects of lower oil prices.

Lower FV estimate; maintain SELL
After factoring in both positive and negative factors, our FY16F net loss narrows from S$6m to S$1.4m. With the larger share base from its rights issue, our fair value consequently decreases slightly from S$0.21 to S$0.18. With a still-muted outlook on the aviation sector in 2015, maintain SELL.

Aviation & Shipping Sectors

OCBC on 5 Dec 2014

In 2014, airlines continued to face intense competition and as a result of overcapacity, yields remained depressed, affecting profitability. The aviation service providers’ revenue growth is positively correlated to air traffic growth and the drop in air travel demand resulted in muted performances throughout the year. The shipping sector also saw disappointing results as the overcapacity issue continued to put downward pressure on freight rates. We are of the view that the aviation sector will continue to face headwinds from overcapacity in the Southeast Asia region, putting a downward pressure on yields in 2015. Hence, on these grounds, we maintain our UNDERWEIGHT rating on both the Aviation and Shipping Sectors.

2014 has been a poor year
In 2014, airlines continued to face intense competition and as a result of overcapacity, yields remained depressed, affecting profitability. To make things worse, the unrest in Thailand and the two aircraft incidents further slowed air travel, as fewer Chinese passengers travelled to South-East Asian countries. Singapore Airlines’ (SIA) [HOLD; FV:S$10.12] 9MCY14 PATMI plunged 56% YoY, dragged down by lower yields, loss making subsidiaries, as well as from its associate, Tiger Airways Singapore (Tigerair). For Tigerair [SELL; FV:S$0.21], it went through an extremely rough year as it divested stakes in loss-making overseas ventures, while charging record high provisions, which led to a ~14x YoY increase in its 9MCY14 net losses. The aviation service providers, SIA Engineering (SIAEC) [SELL; FV: S$3.80], SATS Ltd [HOLD; FV: S$2.92] (SATS) and ST Engineering (STE) [HOLD; FV: S$3.47], also saw a lackluster 2014. Their revenue growth is positively correlated to air traffic growth and the drop in air travel demand resulted in muted performances throughout the year. SATS’ 9MCY14 PATMI declined 6% YoY on weaker performance from subsidiaries, weakening Japanese Yen and rising labour costs. SIAEC fared worse as 9MCY14 PATMI dropped 22.9% YoY due to fewer aircraft checks. In the shipping sector, NOL [HOLD; FV: S$0.84] also posted disappointing results as the overcapacity issue continued to put downward pressure on freight rates.

Maintain UNDERWEIGHT on Aviation Sector
We are of the view that the aviation sector will continue to face headwinds from overcapacity in the Southeast Asia region, putting a downward pressure on yields in 2015. While the recent slide in oil prices is likely to result in an improved global economy with higher growth in 2015 than IMF’s forecast of 3.8%, we think the depressed yields will outweigh the resulting pick-up in air travel demand in 2015. Also, we estimate SIA to be ~30-35% hedged for 2015 while Tigerair to be even lesser, and any cost savings arising from lower jet fuel prices should be more evident in Tigerair’s operations. However, cost savings will also be limited by the lower fuel surcharges. Hence, on these grounds, maintain UNDERWEIGHT rating on Aviation Sector.

Maintain UNDERWEIGHT on Shipping Sector
Logically, containerships should see tremendous savings on lower bunker expenses, which historically makes up ~25% of NOL’s cost base. However, note that NOL’s sales contract includes bunker adjustment factor which is an adjustment to shipping companies' freight rates to take into account fluctuations in the cost of fuel oil (bunkers) for their ships. As such, we believe NOL will not enjoy much savings on lower bunker prices, being neutral to oil price fluctuations. In addition, while the global economy may grow more than IMF’s forecasted 3.8% in 2015 on lower oil prices, the incoming supply of new vessels is expected to grow 8.0% in the same year, putting even more pressures on freight rates. Hence, we believe the operating environment of the sector will remain challenging. Maintain UNDERWEIGHTon the Shipping Sector.

Aviation & Shipping Sectors

OCBC on 5 Dec 2014

In 2014, airlines continued to face intense competition and as a result of overcapacity, yields remained depressed, affecting profitability. The aviation service providers’ revenue growth is positively correlated to air traffic growth and the drop in air travel demand resulted in muted performances throughout the year. The shipping sector also saw disappointing results as the overcapacity issue continued to put downward pressure on freight rates. We are of the view that the aviation sector will continue to face headwinds from overcapacity in the Southeast Asia region, putting a downward pressure on yields in 2015. Hence, on these grounds, we maintain our UNDERWEIGHT rating on both the Aviation and Shipping Sectors.

2014 has been a poor year
In 2014, airlines continued to face intense competition and as a result of overcapacity, yields remained depressed, affecting profitability. To make things worse, the unrest in Thailand and the two aircraft incidents further slowed air travel, as fewer Chinese passengers travelled to South-East Asian countries. Singapore Airlines’ (SIA) [HOLD; FV:S$10.12] 9MCY14 PATMI plunged 56% YoY, dragged down by lower yields, loss making subsidiaries, as well as from its associate, Tiger Airways Singapore (Tigerair). For Tigerair [SELL; FV:S$0.21], it went through an extremely rough year as it divested stakes in loss-making overseas ventures, while charging record high provisions, which led to a ~14x YoY increase in its 9MCY14 net losses. The aviation service providers, SIA Engineering (SIAEC) [SELL; FV: S$3.80], SATS Ltd [HOLD; FV: S$2.92] (SATS) and ST Engineering (STE) [HOLD; FV: S$3.47], also saw a lackluster 2014. Their revenue growth is positively correlated to air traffic growth and the drop in air travel demand resulted in muted performances throughout the year. SATS’ 9MCY14 PATMI declined 6% YoY on weaker performance from subsidiaries, weakening Japanese Yen and rising labour costs. SIAEC fared worse as 9MCY14 PATMI dropped 22.9% YoY due to fewer aircraft checks. In the shipping sector, NOL [HOLD; FV: S$0.84] also posted disappointing results as the overcapacity issue continued to put downward pressure on freight rates.

Maintain UNDERWEIGHT on Aviation Sector
We are of the view that the aviation sector will continue to face headwinds from overcapacity in the Southeast Asia region, putting a downward pressure on yields in 2015. While the recent slide in oil prices is likely to result in an improved global economy with higher growth in 2015 than IMF’s forecast of 3.8%, we think the depressed yields will outweigh the resulting pick-up in air travel demand in 2015. Also, we estimate SIA to be ~30-35% hedged for 2015 while Tigerair to be even lesser, and any cost savings arising from lower jet fuel prices should be more evident in Tigerair’s operations. However, cost savings will also be limited by the lower fuel surcharges. Hence, on these grounds, maintain UNDERWEIGHT rating on Aviation Sector.

Maintain UNDERWEIGHT on Shipping Sector
Logically, containerships should see tremendous savings on lower bunker expenses, which historically makes up ~25% of NOL’s cost base. However, note that NOL’s sales contract includes bunker adjustment factor which is an adjustment to shipping companies' freight rates to take into account fluctuations in the cost of fuel oil (bunkers) for their ships. As such, we believe NOL will not enjoy much savings on lower bunker prices, being neutral to oil price fluctuations. In addition, while the global economy may grow more than IMF’s forecasted 3.8% in 2015 on lower oil prices, the incoming supply of new vessels is expected to grow 8.0% in the same year, putting even more pressures on freight rates. Hence, we believe the operating environment of the sector will remain challenging. Maintain UNDERWEIGHTon the Shipping Sector.

Tiger Airways Holdings

OCBC on 20 Oct 2014

Tiger Airways Holdings (Tigerair) reported a disappointing 2QFY15 results yet again. It recorded a 107.7% YoY increase in 2QFY15 core loss to S$26.6m, mainly due to weaker yields albeit higher traffic volume, which led to a 126.0% increase in 1HFY15 core loss to S$44.3m. Tigerair’s 2QFY15 results were further worsened by large provisions amounting to S$159.1m, which led to net loss amounting to S$182.4m, against its 2QFY14 PATMI of S$23.8m. It also announced last week the proposal to undertake an 85-for-100 rights issue to raise gross proceeds of up to ~S$234m at S$0.20 per rights share. SIA has undertaken to subscribe for its pro rata entitlement as well as excess rights shares up to total of S$140m. We have not factored in the effects of the rights issue as it is only at the proposal stage and with the tremendous drop in book value, we change our valuation methodology to EV/EBITDA instead P/B. Hence, at 8x FY16F EV/EBITDA (regional LCCs average blended FY15F/16F EV/EBITDA: 8.2x), we lower our FV estimate to S$0.21 (prev: S$0.35) while maintaining a SELL rating.

Disappointing 2QFY15 results once again
Tiger Airways Holdings (Tigerair) reported a 10.5% YoY decline in its 2QFY15 revenue to S$146.7m while its 1HFY15 revenue declined 21.1% to S$315.7m due to exclusion of Tigerair Australia, meeting 96.2% of our forecasted 1HFY15 revenue. It also recorded a 107.7% YoY increase in 2QFY15 core loss to S$26.6m, mainly due to weaker yields albeit higher traffic volume, which led to a 126.0% increase in 1HFY15 core loss to S$44.3m. Tigerair’s 2QFY15 results were further worsened by large provisions amounting to S$159.1m. Out of the S$159.1m, S$99.3m was provided for onerous aircraft lease contracts while the remaining provision was for the loss expected from the planned divestment of Tigerair Australia. Taking into account these provisions, Tigerair’s 2QFY15 net loss amounted to S$182.4m, against its 2QFY14 PATMI of S$23.8m.

Proposed rights issue to strengthen balance sheet
The large provisions charged during the quarter weakened Tigerair’s balance sheet tremendously and reduced its book value by 91.9% from S$278.7m as at 31-Mar to S$22.6m as at 30-Sep. It announced last week the proposal to undertake an 85-for-100 rights issue to raise gross proceeds of up to ~S$234m at S$0.20 per rights share. SIA has undertaken to subscribe for its pro rata entitlement as well as excess rights shares up to total of S$140m. In addition, SIA announced that it will convert all of its perpetual convertible capital securities (PCCS) holdings into shares prior to the rights issue, raising its stake in Tigerair from 40% to ~55%. Simply put, if the rights issue is approved, the minimum gross proceeds that Tigerair should receive is at least S$140m.

Change in FV estimate; maintain SELL
With large provisions and a weak performance in 2QFY15, we increase our forecasted FY15F net loss by 145.3% to S$254.4m. But given the reduction in cash burden from the sublease of the 12 aircraft, we narrow our FY16F estimated net loss by 62.7% to S$6.0m. We also have not factored in the effects of the rights issue as it is only at the proposal stage. With tremendous drop in book value, we change our valuation methodology to EV/EBITDA instead P/B. We will review our estimate again when the rights issue is approved. Hence, at 8x FY16F EV/EBITDA (regional LCCs average blended FY15F/16F EV/EBITDA: 8.2x), we lower our FV estimate to S$0.21 (prev: S$0.35) while maintaining a SELL rating. We will review our estimate again when the rights issue is approved.

Tiger Airways

OCBC on 18 Sep 2014

Tiger Airways Holdings (Tigerair) reported passenger load factor (PLF) improvements in the first two months of its 2QFY15 operating statistics. We think PLF is likely to stay above 80% for the rest of 2H14 as Tigerair continues to place focus on managing its load and increasing aircraft utilisation. However, we remain concerned about its 12 grounded aircrafts as they continue to incur lease expenses. On the positive side, with the approval of the anti-trust immunity (ATI) for Tigerair-Scoot alliance (TS), Tigerair will be able to capture interlining passengers flying from Scoot’s medium to long-haul destination, through Singapore, to other parts of Southeast Asia served by Tigerair. We expect the alliance to have meaningful contribution to Tigerair’s results only from 1HFY16 onwards. Hence, we decrease FY15F and FY16F estimated net loss by 4.8% and 69.1% to S$103.7m and S$16.1m, respectively. Consequently, we raise our FV estimate to S$0.35 (prev: S$0.30) while maintaining a SELL rating.

Improvements to PLF but much more needed to be done
Tiger Airways Holdings (Tigerair) reported passenger load factor (PLF) improvements in the first two months of its 2QFY15 operating statistics. Tigerair’s PLF for Jul-14 and Aug-14 increased 3.1ppt YoY to 82.6% and 4.6ppt to 83.1%, respectively. We think PLF is likely to stay above 80% for the rest of 2H14 as Tigerair focuses on capacity management to increase aircraft utilisation. However, we remain concerned about its 12 grounded aircrafts as they continue to incur lease expenses. We believe these aircrafts will continue to be a drag on Tigerair’s earnings until they are able to either sub-lease or novate leases of these grounded aircrafts to other parties. We also do not expect any fleet expansion until 2018, when Tigerair takes delivery for its order for A320neo aircrafts.

Tigerair-Scoot alliance to provide longer-term boost
The anti-trust immunity (ATI) granted to the Tigerair-Scoot alliance (TS) by the Competition Commission of Singapore last month provides both airlines with greater flexibility to coordinate schedules, routes, pricing as well as certain aspects of joint operations. Tigerair will be able to capture growth in interlining passengers flying from Scoot’s medium to long-haul destination, through Singapore, to other parts of Southeast Asia (SEA) served by Tigerair. Specifically, we believe more focus will be placed on coordination of routes between China and SEA. However, in order to capture this market, timing of connecting flights must be coordinated and changes to flight timings require approval from the relevant Singapore authority. Hence, we expect the alliance to have meaningful contribution to Tigerair’s results only from 1HFY16 onwards.

Raised FV estimate on TS boost; maintain SELL
Although the overcapacity issue in SEA is likely to continue to supress yields, we believe Tigerair’s focus on capacity management will alleviate the impact on its earnings. We have made conservative growth assumptions for TS’ FY16 contribution and this will remain so until further details are announced on the coordination of routes and schedules. Hence, we decrease FY15F and FY16F estimated net loss by 4.8% and 69.1% to S$103.7m and S$16.1m, respectively. Consequently, we raise our FV estimate to S$0.35 (prev: S$0.30) while maintaining a SELL rating

Tiger Airways

OCBC on 24 Jul 2014

Tiger Airways Holdings’ (TR) 1QFY15 revenue came in 7.7% below expectations at S$169.0m while higher-than-expected operating costs resulted in an operating loss of S$16.4m. 1QFY15 PATMI loss almost doubled from S$32.8m to S$65.2m due to associate Tigerair Mandala’s operating losses (S$35.3m) and shutdown costs (S$14.6m). Correspondingly, shareholder’s equity was eroded by 22.5% QoQ to S$216.1m, or almost half of the S$469.7m a year ago. Tigerair Singapore, the sole remaining TR operation, reported an operating loss of S$19.8m in 1QFY15 (vs. operating profit of S$5.9m in 1QFY14). Breakeven load factor is at an exceedingly high 96.7%, which essentially implies that Tigerair Singapore cannot breakeven (maximum PLF was 89% in the past three years). Additionally, we think provisions will be made eventually on the four aircraft returned from now-defunct Tigerair Mandala. We maintain SELL with S$0.30 fair value estimate.

1QFY15 losses from operations and one-off costs
Tiger Airways Holdings’ (TR) 1QFY15 revenue came in 7.7% below expectation at S$169.0m while higher-than-expected operating costs resulted in an operating loss of S$16.4m. On a YoY basis, 1QFY15 revenue and operating expenses declined 28.4% and 23.5% respectively due to the exclusion of Tigerair Australia, which ceased to be a subsidiary from 8 Jul-13. 1QFY15 PATMI loss almost doubled from S$32.8m to S$65.2m due to associate Tigerair Mandala’s operating losses (S$35.3m) and shutdown costs (S$14.6m). Correspondingly, shareholder’s equity was eroded by 22.5% QoQ to S$216.1m, or almost half of the S$469.7m a year ago. 

Remaining Singapore operations unpromising
Tigerair Singapore, the sole remaining TR operation, reported an operating loss of S$19.8m in 1QFY15 (vs. operating profit of S$5.9m in 1QFY14). Revenue growth (+3.2% YoY to S$166.0m) stemmed from capacity growth (+14.8%) and improved load factor (+0.8ppt). However, this was more than offset by: 1) weaker yield (-11.5% to 6.24 S-cent/rpk), and increase in unit cost (+4.5% to 6.03 S-cent/ask). Correspondingly, breakeven load factor is at an exceedingly high 96.7%, which essentially implies that Tigerair Singapore cannot breakeven (maximum PLF was 89% in the past three years). But we also note that there are signs of bottoming out as there is yield drop moderates QoQ (from -7.3% in 4QFY14 to -2.2% in 1QFY15) on top of PLF improvements. Management guided that they would improve PLF before yield, though we think the latter is more a function of competition, which is beyond management’s control.

Expect further provisions ahead
Four aircraft are returned to TR from the now-defunct Tigerair Mandala. We understand from management that as planes’ deployment are still being assessed, provisions have not been made. Unless the new Tigerair Taiwan venture can absorb them, we think provisions will be made eventually because: 1) prior eight grounded aircraft suggests lack of redeployment, leasing or sales opportunities, and 2) 1QFY15 aircraft utilisation decreased by 9.0% YoY to 11.3/aircraft/day, thus it is unlikely more planes will be operated. We maintain SELL with S$0.30 fair value estimate.

Tiger Airways

OCBC on 18 Jul 2014

Tiger Airways Holdings’ (TR) Singapore operations improved QoQ in 1QFY15 on the back of peak travel period and active capacity management – passenger load factor (PLF) edged up by 7.1ppt from 79.2% in Mar-14 to 86.3% in Jun-14. On a YoY basis, PLF increased for the first time in nine months by 1.8 ppt in Apr-14. We believe improved PLF YoY can be sustained in FY15 because: 1) TR will not be taking on plane deliveries in 2014-2015, 2) we think the four planes returning from now-defunct Tigerair Mandala will be grounded, and 3) near-term fleet expansion is scaled back by rivals Jetstar Asia and AirAsia. We think improving PLF will only help TR’s performance to bottom out but insufficient for a turnaround; downward pressure on yield will stay as SE Asia’s LCC fleet is projected to grow by a high 17% in 2014 according to CAPA. Maintain SELL with S$0.30 fair value estimate.

Better capacity-demand match in 1QFY15
Tiger Airways Holdings’ (TR) Singapore operations improved QoQ in 1QFY15 on the back of peak travel period and active capacity management – passenger load factor (PLF) edged up gradually by 7.1ppt from 79.2% in Mar-14 to 86.3% in Jun-14. Capacity management was most evident in Apr-14, when capacity (in average seat km, ASK) was lowered by 9.6% MoM, which more than made up for the 5.5% MoM fall in carriage (in revenue passenger km, RPK). Thereafter, capacity was kept relatively steady at ~1.0b ASK while carriage crept up from 860m RPK in Apr-14 to 898m RPK in Jun-14, resulting in better PLF. On a YoY basis, there are signs of bottoming out as PLF increased for the first time in nine months by 1.8 ppt in Apr-14. It subsequently tapered to a 0.9ppt increase in May-14 before falling slightly by 0.2ppt in Jun-14. 

Fleet expansion halt to aid FY15 PLF
We believe improved PLF YoY can be sustained for Tigerair Singapore in FY15. First, TR will not be taking on new plane deliveries in 2014-2015 after cancelling its nine A320 orders in Mar-14, thus providing room to absorb previous capacity growth. Second, we think the four planes returning from now-defunct Tigerair Mandala will be grounded. Previous grounding announced in May-14 suggests TR was already unable to re-deploy the returned aircraft back then. Third, fleet expansion is also scaled back by rivals Jetstar Asia, the Singapore-based subsidiary of Jetstar Group (fleet to stay flat at 19 aircraft for 2014), and AirAsia Group (12 aircraft sales and seven deferrals for 2014; expected 19 aircraft deferrals for 2015).

But turnaround still unlikely
We think the improving PLF will only help TR’s performance to bottom out in FY15 but still insufficient for a turnaround. Though fleet expansion is moderated, SE Asia’s LCC fleet is still projected to grow by a high 17% in 2014 according to CAPA. Hence, downward pressure on yield and thus margins is likely to stay. Maintain SELL with S$0.30 fair value estimate.

Tiger Airways Holdings

OCBC on 5 May 2014

Tiger Airways Holdings’ (TR) 4QFY14 revenue declined 35.1% YoY to S$161.9m due to the exclusion of Tigerair Australia, which ceased to be a subsidiary. Despite deconsolidation of loss-making Australia unit’s results, S$12.7m operating profit in 4QFY13 turned into S$24.2 loss in 4QFY14 as weakness emerges in its main Singapore operations. 4QFY14 PATMI loss increased by 5.2x from S$15.4m to S$95.5m largely due to: 1) S$25.0m provision for onerous aircraft leases (grounding of eight aircrafts), and 2) S$47.4m losses in associates. Management will be focusing on managing capacity and optimising yield ahead, which includes: 1) grounding eight aircrafts in FY15, and 2) re-assessing its stake in Tigerair Mandala. However, the still-intense competition in the LCC industry is likely to check TR’s performances ahead. As we incorporate the latest results, we maintain SELL and lower our FV estimate from S$0.38 to S$0.30.

Results continue to see red
Tiger Airways Holdings’ (TR) 4QFY14 revenue came in 4.3% above expectations at S$161.9m while operating loss of S$24.2m is 62.5% worse than expectations. On a YoY basis, 4QFY14 revenue declined 35.1% due to the exclusion of Tigerair Australia, which ceased to be a subsidiary from 8 Jul-13. Despite deconsolidation of loss-making Australia unit’s results, S$12.7m operating profit in 4QFY13 turned into S$24.2 loss in 4QFY14 as weakness emerges in its main Singapore operations. 4QFY14 PATMI loss increased by 5.2x from S$15.4m to S$95.5m due to: 1) S$25.0m provision for onerous aircraft leases (grounding of eight aircrafts), and 2) S$47.4m losses in associates. On a full year basis, Tigerair Singapore reported operating loss of S$58.6m in FY14, a 180-degree turn from its S$57.1m operating profit in FY13. This is due to the familiar story of weaker yield (-9.9% to 6.74S-cent/rpk) and lower load factor (-6.2ppt to 78.1%), in turn caused by overcapacity and insensible competition. Together with exceptional items (i.e. impairments and provisions) and losses from associates, TR’s net loss widened from S$45.4m in FY13 to S$223.0m in FY14. 

Switching from growth-mode to profitability-mode
Management will be focusing on managing capacity and optimising yield ahead. First, eight aircrafts will be grounded in FY15 (five in Indonesia and three in Philippines). We welcome this move as it will help to reduce operating costs. However, if the grounded aircrafts are unable to be re-deployed or sub-leased to other airlines for a prolonged period, we think further provisions will have to be made. Second, TR has divested its stakes in loss-making Tigerair Australia and Tigerair Philipines in FY14, and is re-assessing its stake in Tigerair Mandala. Third, capacity expansion is checked as orders for nine A320s in 2014-2015 were cancelled, replaced by deliveries further away in 2018-2025.

No turnaround in sight
We like TR’s focus on managing over-capacity and asset-light strategy of network extension through alliances (vs. owning direct stakes previously). However, the still-intense competition in the LCC industry is likely to check TR’s performances ahead. As we incorporate the latest results, we maintain SELL and lower our FV estimate from S$0.38 to S$0.30.

TigerAir

OCBC on 5 Mar 2014

Reuters reported on Monday that Tiger Airways Holdings (TR) may sell or close Tigerair Mandala (TRM) if there are no signs of a turnaround this year. YTD, TR has clocked S$39.5m in share of loss from TRM; 3QFY14: S$11.2m, 2QFY14: S$7.7m, 1QFY14: S$20.6m (S$13.3m incurred in earlier quarters). We would be positive on a sale of TRM. The carrier lacks the economies of scale for Indonesian market, which is facing increasing overcapacity. TRM has only a 1-2% market share, in stark contrast to Lion Air (46%) and Garuda Indonesia (28%), according to CAPA Centre for Aviation. Using a lower FY14F P/B peg of 1.0x (versus 1.1x previously) as TR is expected to remain loss-making this year, we lower our FV estimate from S$0.42 to S$0.38. Maintain SELL.

S$40m share of loss for 1Q-3QFY14
Reuters reported on Monday that Tiger Airways Holdings (TR) may sell or close Tigerair Mandala (TRM) if there are no signs of a turnaround this year. YTD, TR has clocked S$39.5m in share of loss from TRM; 3QFY14: S$11.2m, 2QFY14: S$7.7m, 1QFY14: S$20.6m (S$13.3m incurred in earlier quarters). 

A sale would not be surprising
In 2012, Mandala Airlines (later rebranded TRM) underwent a financial restructuring, during which TR bought a one-third stake. TR's stake was brought up to 35.8% in Sep 2013. Saratoga, an Indonesian PE firm, owns 51% of TRM. Both Saratoga and TR are reportedly not interested in increasing their investments in TRM. We would be positive on a TRM sale. The carrier lacks the economies of scale for Indonesian market, which is facing increasing overcapacity. TRM has only a 1-2% market share, in stark contrast to Lion Air (46%) and Garuda Indonesia (28%), according to CAPA Centre for Aviation. A potential sale is not surprising, given that TR has been reducing its exposure to the other loss-making cubs. TR sold a 60% stake in Tigerair Australia in Jul 2013 to Virgin Australia and in Jan this year, it entered an agreement to sell its full 40% stake in Tigerair Philippines to Cebu Air, the parent of Cebu Pacific. In an article dated 19 Feb, CAPA reported that TRM is reducing its total number of flights by 42% and more than halving the number of routes being operated (19 at the beginning of the year), by mid-Mar. CAPA cites TRM CEO Paul Rombeek as saying that on an available seat kilometres (ASK) basis the shrinkage will be 30%.

Maintain SELL 
Using a lower FY14F P/B peg of 1.0x (versus 1.1x previously) as TR is expected to remain loss-making this year, we lower our FV estimate from S$0.42 to S$0.38. Maintain SELL.

TigerAir

OCBC on 24 Jan 2014

Tiger Airways Holdings (TR) recorded a shocking S$118.5m net loss, including S$88.3m in exceptional charges, for 3QFY14; net profit a year ago was S$2.0m. The exceptional charges comprise a S$30.3m loss on the planned disposal of Tigerair Philippines (TRP) and an impairment of associates of S$58.0m (this latter number excludes TRP). TR also clocked S$23.1m as its share of losses of associates. While Tigerair Singapore (TRS) saw an increase in traffic volume of 9.2% YoY, its revenue fell by 2.9% to S$168.0m. Yield had contracted 11.3% and load factor declined by 9.8 ppt to 75.8%. Management states the TRS continues to face short-term pressure on yield and load factors in the current seasonally weaker quarter given the industry’s overcapacity situation. TR’s NAV fell from S$0.51 as of end-Sep to S$0.39 as of end-Dec. Adjusting our estimates, we cut our FV estimate from S$0.55 to S$0.42 (1.1x FY14F P/B) and downgrade TR from Hold to SELL. We expect strong pressure on the share price following these disappointing results.

Associates cause major loss
3QFY14 revenue for Tiger Airways Holdings (TR) declined 30.5% YoY to S$172.1m due to the absence of Tigerair Australia (partially disposed), and a fall in revenue for Tigerair Singapore (TRS). The partial disposal of TRA meant lower expenses of S$180.9m, down 21.3% YoY, partially offset by TRS’ higher cost. TR recorded a shocking S$118.5m net loss, including S$88.3m in exceptional charges, for 3QFY14; net profit a year ago was S$2.0m. The exceptional charges comprise a S$30.3m loss on the planned disposal of Tigerair Philippines (TRP) and an impairment of associates of S$58.0m (this latter number excludes TRP). TR also clocked S$23.1m as its share of losses of associates. TR’s share of losses in Tigerair Mandala, TRA and TRP were S$11.2m, S$7.4m and S$4.5m respectively. The divestment of TRP is expected to be completed in 4QFY14 and additional losses relating to TRP are not expected. 

TRS to face more near-term pressure
While TRS saw an increase in traffic volume of 9.2% YoY, its revenue fell by 2.9% to S$168.0m. Yield had contracted 11.3% and load factor declined by 9.8 ppt to 75.8%. Unit cost increased by 2.8% as growth in expenses (+26.8%) was greater than that of capacity (+23.3%). Cost increase for TRS was mainly due to increase in capacity and larger fleet size. TRS registered an operating loss of S$17.0m versus an operating profit of S$27.0m a year ago. Management states that TRS continues to face short-term pressure on yield and load factors in the current seasonally weaker quarter given the industry’s overcapacity situation. TRS will be taking delivery of one more Airbus A320 within the financial year and will also be absorbing two Airbus A319s from TRP’s fleet following the divestment of the associate airline.

Cut FV to S$0.42
We cut our FV estimate from S$0.55 to S$0.42 (1.1x FY14F P/B) and downgrade TR from Hold to SELL. We expect strong pressure on the share price following these disappointing results.

TigerAir

UOBKayhian on 16 Jan 2014

FY14F PE (x): n.m.
FY15F PE (x): n.m.

Expect disappointing earnings. Tigerair will report 3QFY14 results on 24 January. We
expect the airline to post an operating loss of S$15.8m, reversing from 3QFY13
operating profit of S$17.9m. A 9.8ppt yoy decline in loads coupled with weak yields
should lead to operating losses. Load factor (PLF) for 3QFY14 was the lowest in three
years. Consequently, we expect yields to have remained depressed and assume a 12%
yoy decline but a 3% qoq improvement.

We raise FY14 net loss forecast by 176%, as we factor in S$13.5m of additional losses
from Tigerair’s divestment of its stake in Tigerair Philippines and a further S$4.5m losses
from the same over the next two quarters. We also lower our load factor assumptions by
1.3ppt to 77.7%. We lower FY15 net losses by 11% as we fine-tune our interest expense
assumptions.

Maintain HOLD. We value Tigerair at 1.2x FY14F book value and derive a fair value of
S$0.538. Recommended entry level is S$0.47, based on a 15% required return.

Tiger Airways

CIMB Research, Jan 8

IN our Jan 6 report, we had hoped that Tiger Airways (TGR) would get at least S$12.5 million for its 40 per cent stake in Tigerair Philippines (TAP). However, the agreement with CEB was for only S$8.9 million, 30 per cent below our expectation. TGR also surprisingly agreed to bear S$22.4 million in TAP liabilities.

Thus, TGR will report a loss of S$13.5 million versus our expectations of a gain, leading us to downgrade our FY14 reported net profit and keep the Reduce call.

Core EPS in FY14 is reduced one per cent for housekeeping matters but raised in FY15-16 due to the removal of TGR's share of TAP's losses. This raises our target price slightly, still based on 1 times CY14 P/BV. The de-rating catalysts include tough Australian and Indonesian markets.

Even though the equity value of TAP has already been written down to zero in TGR's books, TGR will still record a loss from the transaction as it has agreed to settle all of TAP's outstanding liabilities amounting to S$22.4 million prior to the sale to CEB.

Although TGR only owns 40 per cent of TAP, it will bear all of these liabilities on its own, which suggests that the remaining 60 per cent shareholders are unable or unwilling to bear the burden. CEB will take over 100 per cent of TAP with a clean slate.

Such a lopsided deal in favour of CEB indicates that TGR's bargaining power was very weak, likely due to the absence of other buyers. However, TGR can at least stop the red ink in the Philippines and eliminate the need for further cash injections.

The two A319s leased by TGR and currently used by TAP will return to TGR to be used for routes with lower levels of demand. Three A320s leased by TAP will be novated to TGR, which will take over as the lessee, but they will then be sub-leased to CEB for possibly a few months. Once CEB returns the three A320s, TGR can reallocate them to grow Tigerair Mandala.

We view the strategic alliance with CEB as mutually beneficial. TGR will be able to share capacity to the Philippines with CEB, and possibly coordinate scheduling and pricing, subject to regulatory approval.

With the partial dismantling of ex-CEO Tony Davis's vision of a wide pan-Asian network, TGR will emerge as an asset-light player focusing only on Singapore and Indonesia. It will work with other airline partners in Australia, the Philippines and Taiwan.

REDUCE

TigerAir

OCBC on 6 Jan 2014

An online Philippine news portal, InterAkyson, reported last Friday that Cebu Pacific is in talks to acquire Tigerair Philippines (TRP) from Tiger Airways Holdings (TR). The article quoted an executive director of the Civil Aeronautics Board as saying that Cebu Pacific has filed an application to acquire 100% of TRP. TR has confirmed that it is in the midst of negotiating a proposed transaction involving TRP but emphasised that no definitive agreement has been signed yet. TR owns 40% of TRP. For the latest quarter, 2QFY14, losses for TRP widened to S$9.0m despite narrowing losses for the previous three quarters (-S$8.3m in 3QFY13; -S$7.3m in 4QFY13; -S$6.0m in 1QFY14). We believe that a sale of TRP should be a positive for TR, given that TRP operates in a market suffering from overcapacity. Pending additional updates, if any, regarding the possible sale of TRP, we maintain our HOLD rating and fair value rating of S$0.55 (based on 1.1x P/B) on TR.

Cebu Pacific may be in talks with TR
An online Philippine news portal, InterAkyson, reported last Friday that Cebu Pacific is in talks to acquire Tigerair Philippines (TRP) from Tiger Airways Holdings (TR). The article quoted an executive director of the Civil Aeronautics Board as saying that Cebu Pacific has filed an application to acquire 100% of TRP. The director also said that the CAB is evaluating the planned buyout and that the agency expects to finish the review within the next two weeks. TR has confirmed that it is in the midst of negotiating a proposed transaction involving TRP but emphasised that no definitive agreement has been signed yet. TR owns 40% of TRP.

Operational challenges
To recap, TRP, like TR’s two other associate airlines, Tigerair Mandala (TRM) and Tigerair Australia (TRA), has been facing persistent operational challenges, specifically the lack of demand growth, competitive fare pressures and expansion in industry capacity. For the latest quarter, 2QFY14, losses for TRP widened to S$9.0m despite narrowing losses for the previous three quarters (-S$8.3m in 3QFY13; -S$7.3m in 4QFY13; -S$6.0m in 1QFY14). We believe that a sale of TRP should be a positive for TR, given that TRP operates in a market suffering from overcapacity. 

Tie-ups with China Airlines, Scoot and SpiceJet 
On 16 Dec, TR made three announcements. Firstly, Tigerair signed a JV agreement with China Airlines to establish Tigerair Taiwan, a Taiwan-based budget carrier. Tigerair will hold a 10% stake in the new carrier, which will have a paid-up capital of NT$2b (~S$85m). We like that TR is taking a relatively small stake, while the partnership will increase the group's reach to Japan and Korea. Secondly, Tigerair and Scoot signed an alliance agreement to further align their commercial activities, and provide greater choice and flexibility for customers. Thirdly, Tigerair signed a three-year interline agreement with India-based LCC SpiceJet. Pending additional updates, if any, regarding the possible sale of TRP, we maintain our HOLD rating and fair value rating of S$0.55 (based on 1.1x P/B) on TR.

TigerAir

OCBC on 25 Oct 2013

We were disappointed by Tigerair’s (TR) 2QFY14 results, which showed a larger operating loss (S$12.8m vs. S$11.5m in 2Q13) due to higher operating costs. Performance by its associate airlines during the quarter was also weak with overall losses at almost S$24m (S$26.6m in 1Q14; S$3.8m in 2Q13), and that lead to an erosion of gains from the disposal of 60% interest in Tigerair Australia. Although there were some seasonality factors at play, the lack of demand traction and competitive fare pressures force us to temper our earlier optimism over TR’s performance for FY14/15. Lowering our FY14/15 net profit projections considerably to account for the growing pains of its associate airlines and the likelihood of depressed passenger yields for Tigerair Singapore in the near-term, we downgrade TR to HOLD with a reduced fair value estimate of S$0.55 (S$0.79 previously).

Disappointing 2Q14 results
Tigerair’s (TR) 2QFY14 revenue fell 16.7% YoY to S$163.8m due to the exclusion of Tigerair Australia (TRA), which had been deconsolidated as of Jul. Nonetheless, despite the 13.8% YoY increase in revenue by Tigerair Singapore (TRS) to S$151.3m, higher unit costs and service charges resulted in lower passenger yields and a widening of operating losses to S$12.8m from -S$11.5m in 2Q13. Losses from TR’s associate airlines also continued, clocking in at almost S$24m for the quarter (-S$26.6m in 1Q14; -S$3.8m in 2Q13). Only with the one-off gain from TRA’s disposal did TR record a net profit of S$23.8m. 

More time needed to grow the cubs
We admit that our initial optimism for TR’s associate airlines over the past year was premature. TR’s three associate airlines – Tigerair Philippines (TRP), Tigerair Mandala (TRM) and TRA – still face operational challenges (i.e. lack of demand traction, competitive fare pressures and the absorption of additional capacity) that show little signs of abating. For instance, losses for TRP widened in 2Q14 to S$7.7m despite narrowing losses for the previous three quarters (-S$8.3m in 3Q13; -S$7.m in 4Q13; -S$6.0m in 1Q14). While TR will continue to introduce new routes, we expect pick-up rates to be slow and passenger load factors (PLFs) to stay depressed. 

Forecasts reduced; downgrade to HOLD
That said, we lower our FY14/15 net profit projections considerably to account for the growing pains, leaving us with only a smaller overall profit for both years. In the interim, 3QFY14’s seasonal uptick in traffic volume is likely to be negated by capacity expansion (lower PLFs), and fares could remain under pressure due to promotional fares from competitors – even premium carriers – with higher unit costs lowering yields on a YoY basis. Applying a P/B multiple of 1.1x, we lower our fair value estimate to S$0.55 (S$0.79 previously). Downgrade TR to HOLD.