Singapore Airlines - Tiger fills up its tank (KimEng)

What’s New

 Singapore Airlines’ (SIA) 32.8%‐owned associate Tiger Airways has announced a 1‐for‐2 rights issue to raise $158.6m. SIA will underwrite up to 81.8% of the total issue. At a rights price of $0.58 per Tiger share, SIA’s subscription to its entitlement amounts to $51.9m and a maximum potential commitment of $77.9m. The issue will create no stress on its cash pile of around $6b. The recent sharp pullback has brought SIA’s valuations to attractive levels; we upgrade SIA to BUY with target price at $14.40.

Our View

 Tiger’s rationale for the fund‐raising is to strengthen its balance sheet and to partially finance the payments for its committed orders of aircraft through 2015. At $0.58 per share, the issue represents a steep 39% discount to its last traded price, as well as a 30% discount to its theoretical ex‐rights price of $0.83. If SIA has to take up its underwritten shares, its stake in Tiger will rise to 49%. Temasek Holdings, which holds 8.0% of Tiger, has also committed to subscribe.

 Tiger has lost 25% of its market value, or around $135m, since early July. Share price tumbled after its Australian operations were suspended due to safety lapses. Tiger has since resumed its Australian operations on a limited scale, under the watchful eyes of the Australian regulators.

 SIA has taken a more hands‐on approach to managing Tiger. The budget carrier’s interim group CEO, Mr Chin Yau Seng, has been appointed from SIA. SIA legend, Mr J.Y. Pillay, has also been named the non‐executive chairman. We believe SIA intends to increase its stake in Tiger and the rights issue with its sharp discount is an effective way to do so. While the overall contributions from Tiger to SIA’s earnings are not significant, it clearly sees value in it and the low‐cost carrier model. SIA is also in the process of setting up a separate medium‐to‐long‐haul low‐cost carrier.

Action & Recommendation

While the rights issue is not financially significant, we upgrade SIA to a BUY following its share price correction of 25%, versus the STI’s decline of 15%. Our target price is unchanged at $14.40, based on 1.2x P/B. Trough valuation in 2008 was a P/B of 0.8x, translating to a implied floor of $9.50. Short‐term earnings may be at risk but we believe SIA’s balance sheet will enable it to weather the storm, just as it has done several times before.