Tiger Airways (DMG)

Thai-Tiger still in the cards (NEUTRAL. S$1.33, TP S$1.40)

We recently had a conference call with Thai Airways over the fate of Thai Tiger. Thai Airway’s new budget carrier, Thai Wings is not meant to replace Thai Tiger but will target the middle market, and be similar to Singapore Airline’s Silkair. However the fate of the JV still remains in the hands of Thailand’s Ministry of Transportation and will be known after the Thai elections set for 3 July 2011. We maintain our neutral stance with a TP of S$1.40.

Thai Wings not to replace Thai-Tiger. Thai Airways’s new budget carrier, Thai Wings which is targeted to commence operations by April 2012 will not be in direct competition with Thai-Tiger. Instead, it will be targeting the middle market, in between the high end and lower end and be similar to SIA’s SilkAir. Our channel checks reveal that while Thai Airways has a 39% stake in budget carrier NokAir (which also services the middle market), Thai has been unhappy with its minority stake as it is unable to exert enough control over the airline’s strategy and operations. We also believe that Thai wishes to gain from Tiger’s expertise in running a low cost airline.

Details on Thai-Tiger. The future of Thai-Tiger is still pending the Ministry of Transport’s approval and will be known after the Thai elections which is due to be held on 3 July 2012. We were told that while Thai will hold the majority stake (51%) in the JV, all the branding of the planes will be under Tiger Airways and the fleet will come from the latter. It said that Tiger has committed ten A320s in the first year should the JV take-off. Tiger is expecting net nine new aircraft deliveries this FY12 so we should expect it to advance deliveries should the JV be approved. The first route to be taken by the JV would be Tiger’s current BKK-SIN route.

Huge upside if JV is approved. We believe the Thai market offers huge potential for Tiger should the Thai-Tiger JV be approved. At present, we understand that Thai Airways holds a 40% market share while Air Asia holds another 40%. While it appears that Thai has lost market share to Air Asia, we were told by management that absolute number of passengers carried has actually not dwindled but Air Asia has just managed to create a whole new niche demand. We believe that Thai-Tiger is well placed to be a formidable competitor to Thai Air Asia as it would be part of the national carrier’s arm. This would be appealing to the patriotic Thais who are potentially likely to favor supporting their own national carrier.

Valuations. We have chosen to be conservative with our estimates and assumed that the Thai-Tiger JV will not be approved. We maintain our earnings estimates for now and maintain our NEUTRAL stance on the stock with a TP of $1.40, pegged to 12x FY12F earnings.