Trading Sell (Downgraded)
Closing Price S$1.19
Target Price S$1.07 (-10.3%)
• CASA suspended Australia operations for at least 5 working days
• Losses not significant unless suspension is extended
• Singapore operations unaffected
• Downgrade recommendation to Trading Sell with reduced target price of S$1.07
CASA suspended Tiger Airways Australia till 9th July 2011
Australia’s aviation regulator, Civil Aviation Safety Authority (CASA) ordered Tiger Airways Australia to suspend its services at least till 9th July 2011 over safety concerns. This follows from a “show cause” notice issued on 23rd March 2011. We do not think that the losses are substantial for this initial period of suspension, but the financial impact could be significant if the suspension period is extended or if their flying license in Australia is revoked.
Reputation & consumer confidence affected
With safety concerns and the disruptions experienced by passengers, the company’s reputation and consumer confidence is negatively affected. Furthermore, this disruption gives their competitors an opportunity to capitalize on their woes and increase their market share in the highly competitive domestic business.
No disruption to Singapore’s operations
According to news reports by channelnewsasia, Singapore’s regulator Civil Aviation Authority of Singapore (CAAS) had expressed no cause for concern in Tiger Airways Singapore’s operations. That is a consolation to shareholders as the profits of the group over the past few years had been driven primarily by its Singapore operations.
Financial Impact not significant for now
Tiger Airways disclosed that the suspension would cost the company an estimated S$2mn a week. We opine that the impact of a week’s suspension may not be substantial as its Australia’s operations generated S$279mn of sales last year. Moreover, the business in Australia had been in the red for the past 4 years and is not a source of profit to the group’s bottom line. However, we expect substantial impact if Tiger Airways exit the Australia domestic scene completely or if a prolonged suspension is imposed.
Time to disembark
We have not made any adjustments to our earnings forecasts for now due to lack of clarity over the full extent of disruptions. While we see long term value in Tiger Airways, we expect downward pressure on its share price in the near term. Potential downside catalysts that could result in further decline in the share price includes (1) an extension of its suspension in Australia, (2) revocation of its license in Australia, (3) delays to commencement of operations for its JVs. We revised our valuation to reflect the uncertainty to its Australia operations and reduced our target price to S$1.07, based on 8X FY12E P/E. Trading Sell.
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