Tiger Airways Holdings Limited (CIMB)

Grey skies down under, but value emerging

NEUTRAL Upgraded
S$1.28 Target: S$1.40
Mkt.Cap: S$698m/US$564m
Airlines

Volcanic ashes ground flights in Australia…

… but upgrade from Underperform to Neutral. Volcanic ash from the Chilean Puyehue eruption has reached Australia and New Zealand. Tiger Australia announced yesterday that it has halted all flights until the situation improves. We lower our FY12 earnings estimate by 11.6% but retain our FY13-14 forecasts. Accordingly, our target price dips to S$1.40 (from S$1.43), still based on 8x CY12 EPS, the industry’s 4-year historical forward average. Despite our earnings revision, we see some value emerging from Tiger’s recent underperformance. We believe negatives from its regional expansion issues are gradually priced in, and upgrade it to Neutral. Further re-rating catalysts could include: 1) a favourable outcome in its regional expansion; 2) weakness in oil prices; and 3) a pick-up in the global economic outlook.

The news
According to the Sydney Morning Herald, volcanic ash from the Chilean Puyehue eruption had reached Australia on Saturday night and is expected to linger in the next few days. Flights to and from Melbourne, Tasmania and New Zealand have been grounded, as airlines take no chances. On Sunday evening, Tiger Australia cancelled 12 flights and halted services in Australia until the situation improves.

Comments
Financial impact. Tiger has three bases in Australia, two in Melbourne (Avalon and Tullumarine). Management has decided to take precautionary measures by halting all services in Australia. Tiger Australia currently operates 10 aircraft, each with six scheduled flights per day. Depending on the period of service suspension, Tiger Australia could face losses of up to S$6.5m per week.

Minor speed bump to its Australian recovery. However, in our view, this event is but a minor speed bump in Tiger Australia’s recovery, with its longer-term prospects still positive. Management is managing capacity in Australia to limit losses.

Value emerging from recent sell-down. Tiger’s share price has taken some beating from its poor full-year performance, uncertainties from its regional expansion and CEO Tony Davis’s recent share sales. We believe most of the negatives are gradually priced in. With new capacity transferred to Asia, Tiger should be able to tap strong regional demand, and benefit from a lower-cost base. In addition, its quest for a second base in Asia, if successful, could possibly act as a share-price catalyst. Tiger is trading at 7.2x CY12 P/E, below the industry’s 4-year historical forward average. Its implied EV/EBITDAR is 6.6x, below the 7-9x range for high-growth airlines. We see value emerging.

Valuation and recommendation
Upgrade from Underperform to Neutral. While there may still be some downside risks from its regional expansion and high oil prices, Tiger is trading below peers and we believe the negatives are gradually priced in. We upgrade it to Neutral, albeit with a lower target price of S$1.40 after accounting for the flights grounded. We could rerate the stock again on avourable outcomes in its regional expansion; weakness in oil prices; and a pick-up in the global economic outlook.