Tiger Airways

OCBC on 29 June 2012

The SGD-adjusted jet fuel price (JETKSIFC Index) is currently trading at 10% below the average of jet fuel prices in the current quarter, which is in turn 7% QoQ lower. Since fuel cost contributes to more than 40% of Tiger Airways’ (TGR) operating costs, it should be able to achieve ~S$5m of savings in fuel cost in 1QFY13. Tiger Australia will begin operations in Sydney as its second base in 2QFY13 and Tiger Singapore will be moderating its capacity expansion in FY13. With Tiger Australia flying more sectors and lowering its unit fixed cost and Tiger Singapore more focused on improving yields and load factors, TGR’s profitability is poised to considerably improve in FY13. Factoring in lower jet fuel prices and the expected improvement in TGR’s operations, we upgrade TGR’s rating to BUY and increase our fair value estimate of TGR from S$0.67/share to S$0.76/share.

Jet fuel prices finally fell
The SGD-adjusted jet fuel price (JETKSIFC Index) is currently trading at 10% below the average of jet fuel prices in the current quarter, which is in turn 7% QoQ lower than in 4QFY12. After remaining stubbornly high for more than a year, jet fuel prices have finally soften significantly. Tiger Airways (TGR) is likely to benefit from the current respite in jet fuel prices, especially with fuel cost contributing to more than 40% of its operating costs. Based on our estimation, TGR should be able to achieve ~S$5m of savings in fuel cost in 1QFY13, given the 7% QoQ fall in average jet fuel prices.

Recovery in core operations
Tiger Australia is on track to begin operations in Sydney as its second base in 2QFY13. Tiger Australia will then be able ramp up its operations to 64 sectors/day and optimise the utilisation of its 10 aircraft. Meanwhile, Tiger Singapore will be moderating its capacity expansion in FY13. In FY12, Tiger Singapore expanded capacity rapidly, after the group’s deliveries of new aircraft were directed to Singapore as a result of TGR’s flying restrictions in Australia. With Tiger Australia flying more sectors and lowering its unit fixed cost and Tiger Singapore more focused on improving yields and load factors, TGR’s profitability is poised to considerably improve in FY13.

Regional JVs in place to absorb new aircraft deliveries
TGR’s strategy of owning regional JVs is taking shape after its 40%-stake investment into South East Asian Airlines (SEAir) was finalised earlier this month, and encouraging early operating statistics from its 33%-owned PT Mandala Airlines (Mandala). These JVs are earmarked to absorb most of TGR’s aircraft deliveries in FY13, allowing Tiger Singapore to stop its forced capacity expansion.

Upgrade to BUY with higher fair value of S$0.76
We upgrade TGR’s rating to BUY and increase our fair value estimate of TGR from S$0.67/share to S$0.76/share, by increasing its P/B multiple from 2.2x to 2.5x. The upgrade is to factor in lower jet fuel prices and the expected improvement in TGR’s operations.