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