Tiger Airways (DMG)

Cloudy times (NEUTRAL, S$1.41, TP S$1.40)

Thai Airways has announced that it will be setting up its own budget airline - Thai Wings - to compete with AirAsia. This is a negative development for Thai Tiger (a JV between Thai Airways and Tiger Airways) as it has been delayed for months, awaiting for an approval by the Ministry of Transportation. To compound matters, Tiger's CEO Tony Davis has just sold 1m shares at S$1.42, paring down his stake from 0.75% to 0.57%. We maintain NEUTRAL on the stock with a TP of S$1.40, pegged to 12x FY12F earnings. In the low cost space, we prefer AirAsia with a TP of RM3.89, pegged to 12x FY11F earnings.

Thai Airways to set up own budget airline. Thai Airways has announced it will establish a new budget carrier tentatively dubbed “Thai Wings” to compete head on with AirAsia. According to Bernama, Piyasvasti Amranand, president of Thai Airways, said THAI will continue to serve high end passengers while the new airline will serve middle market and Thai Tiger will serve the lower market. According to CAPA, Thai Wing will operate shorthaul services with five leased B737s and two other leased aircraft in its first year with the fleet expected to reach 11 within three years. Operations are targeted to commence by April 2012. Thai which signed an MoU with Tiger last year to form a 51:49 JV said the launch of Thai Tiger has been delayed till July/August 2011.

CEO Tony Davis sells 1m shares. CEO Tony Davis has further pared down his stake in the airline by 1m shares, or 24.3% of his holdings at S$1.42. This reduces his stake in the airline from 0.75% to 0.57%. The sale is below the IPO price of S$1.50 and comes at a time when the airline is faced with rising headwinds in its regional expansion.

No change in estimates, as assumptions already conservative. We maintain our earnings estimates as we believe our assumptions are conservative. Our earnings are based on the assumption that aircraft utilisation will fall from 4.9 sectors p/aircraft/day to 4.7x/4.6x in FY12/FY13. We also assume average ticket prices will fall from S$83 in FY11 to S$79/S$78 in FY12/FY13 as the airline tries to entice passengers with cheap tickets. We believe a load factor of 84% for FY12/FY13 is sustainable in light of cheap tickets.

Maintain NEUTRAL. We expect the market to react negatively to the news. We maintain our NEUTRAL stance on the stock with a 12-month TP of S$1.40, pegged to 12x FY earnings