Tiger Airways

OCBC on 22 May 2012

FY12 was a difficult year for Tiger Airways’ (TGR) after the Australian aviation authorities imposed restrictions on its Australian operations and further aggravated by high jet fuel prices. However, TGR is now on the road to recovery. TGR is scheduled to begin operations in Sydney from Jul 2012, allowing it to ramp up its operations and optimise the utilisation of its aircraft. Its regional JVs are also taking shape, which should allow Tiger Singapore to return to gradual capacity expansion. However, if Mandala and SEAir fail to take on the earmarked aircraft, TGR’s core operations will again be saddled with having too many aircraft. We increase our fair value estimate of TGR from S$0.60/share to S$0.67/share, so as to reflect its improving operations, and upgrade it to HOLD.

FY12 – a difficult year for TGR
In FY12, Tiger Airways’ (TGR) revenue slipped 1% to S$618m and it swung to a net loss of S$104m, from a net profit of S$40m in FY11. TGR’s net loss was in line with our estimate of S$107m, but was 12% bigger than consensus net loss forecast of S$93m. FY12 was a difficult year for TGR after the Australian aviation authorities imposed restrictions on its Australian operations and jet fuel prices remained persistently high.

FY13 – year of recovery
In Australia, TGR is on track to begin operations in Sydney as its second base from Jul 2012. Tiger Australia will then be able ramp up its operations to 64 sectors/day and optimise the utilisation of its 10 aircraft. Meanwhile, TGR’s strategy of forming regional JVs is taking shape and with the JVs absorbing part of the aircraft deliveries, Tiger Singapore can stop its forced capacity expansion. PT Mandala Airlines (Mandala) has returned to the skies and, according to management, early operating statistics are encouraging. Separately, TGR has revived negotiations on its proposed investment in the Philippines’ South East Asian Airlines (SEAir) by signing a revised term sheet to purchase a 40% stake for US$7m.

Risk in JVs’ ability to take on additional aircraft
Management guided that TGR’s fleet will grow to 43 by end-FY13, of which 19 are earmarked for Singapore, 11 in Australia, eight with Mandala and five with SEAir. This means Mandala and SEAir have to each absorb another five aircraft from TGR, failing which TGR’s core operations will again be saddled with having too many aircraft.

Upgrade to HOLD with higher fair value of S$0.67
We increase our fair value estimate of TGR from S$0.60/share to S$0.67/share, by increasing its P/B multiple from 1.9x to 2.2x, to reflect TGR’s encouraging plans and improving operations. Based on this, we upgrade TGR’s rating to HOLD. However, key risks to its operations, including execution risks, remain.