Tiger Airways Holdings Limited - Don’t expect a turnaround soon (CIMB)

UNDERPERFORM Maintained

S$0.93 Target: S$0.54

Mkt.Cap: S$507m/US$422m

Airlines

Rights issue analysts’ briefing

New management has returned to the market with more concrete plans to pull troubled Tiger out of its rut. However, we are still unimpressed, given near-term turbulence in Australia as well as Tiger’s inability to secure a new base elsewhere in Asia. We maintain our Underperform rating, earnings estimates and target price of S$0.54, still based on 8x CY12 P/E, the industry’s mid-cycle forward average. Tiger’s theoretical ex-rights price is S$0.81. Adjusting for its recent rights, our ex-rights target price will be S$0.46. De-rating catalysts could come from prolonged losses in Australia and an inability to secure a new base in Asia.

Takeaways

Potentially greater involvement by parent? Management remained tight-lipped on SIA’s potential involvement in the day-to-day operations of Tiger Airways. According to Acting CEO Chin Yau Seng, Tiger and SIA will continue to operate independently, though he does not rule out tie-ups.

Tiger Australia remains caged. Tiger Australia remains restricted to 18 daily flights in August and its ability to increase flights beyond August are subject to approval from CASA. Currently, only 3-4 of Tiger Australia’s eight aircraft are active on a daily basis, as a result of its 18-daily-flight restriction. While management is working hard with CASA to lift its flight restrictions, uncertainties continue to loom.

Fleet-management update. Tiger is expected to have 35 aircraft at end-FY12. Tiger will deploy 20 in Singapore and eight in Australia, as well as lease two to SEAIR in the Philippines. Management plans to deploy the remaining five to potential new bases, though such plans are subject to its success in securing a new base in Thailand, the Philippines or Indonesia. Management does not rule out the possibility of sub-leasing its planes should it be unable to absorb the additional capacity coming on-stream.

Pushing for a second Asian base. Tiger is attempting a JV with Thai Airways in Thailand and is looking for stake acquisitions in the Philippines and Indonesia to set up a new low-cost base in Asia. Management hinted that it is attempting to secure a base in Indonesia by end-FY12. Progress of Tiger’s proposed 32.5% stake acquisition of SEAIR has been hampered by complexities in the deal structure. Developments in Thailand remain uncertain.

Capital management. Part of the proceeds from the rights issue will be used to support pre-delivery and final-delivery financing. Management will also fund its aircraft delivery programme with internal funds and working capital. Moreover, Tiger will tap sale-and-leaseback transactions to monetise new deliveries.

Comments

Delays in lifting flight restrictions will prolong losses. Due to its 18-daily-flight restriction, Tiger Australia is only able to operate 3-4 aircraft out of its fleet of eight.

This means that at least half of its fleet is idle. Only by lifting its flight restrictions can Tiger Australia scale up its operations. Till then, Tiger Australia will continue to bleed.

Demand for Tiger Australia’s services still weak. Tiger Australia has resumed flights to three of Australia’s most popular domestic routes: Sydney (5x daily), Brisbane (2x daily) and Gold Coast (1x daily). Based on its existing routes and schedule, Tiger appears to be flying 16 times daily, below its maximum restriction of 18 flights. We believe this suggests very weak demand for Tiger Australia’s services, keeping in mind that its existing demand comes from forward bookings before its suspension, which would only support demand up until 29 Oct 11.

Playing catch-up with peers. In our previous note, we mentioned that Tiger is struggling to catch up with peers AirAsia and Jetstar. AirAsia has already launched AirAsia Philippines and AirAsia Japan. Jetstar has also ridden on the coattails of parent Qantas to enter the Japanese market. In our view, Tiger is a clear laggard in the race to expand its network in Asia.

Aircraft-cancellation and deferment risks remain high. Part of Tiger’s proceeds from its proposed rights issue will be used for aircraft pre-delivery and final- delivery payments. On a positive note, this signals management’s commitment to delivering newbuilds hrough 2015. However, we believe this also raises the risk of flight cancellations and deferment, which could be a major share-price de-rating catalyst. Tiger will be allocating five new aircraft to its regional joint ventures in Thailand, the Philippines and Indonesia, on the premise that it will be able to secure a new base in the Asia Pacific. Even if Tiger were to secure a new base in Thailand, the Philippines or Indonesia, Tiger would be operating in very tough markets with established incumbents in each market. Lastly, head-on competition with AirAsia, which already has a first-mover advantage in these markets, will not be easy. Potentially poor demand in these markets could force Tiger to defer additional capacity in the early stages of its expansion, we believe.

Valuation and recommendation

Maintain Underperform. Tiger continues to operate in a turbulent environment in the near term, and we believe it is too early to expect a turnaround. We maintain our Underperform rating, earnings estimates and target price of S$0.54, still based on 8x CY12 P/E, the industry’s mid-cycle forward average. Tiger’s theoretical ex-rights price is S$0.81. Adjusting for its recent rights, our ex-rights target price is S$0.46. De-rating catalysts could come from prolonged losses in Australia and an inability to secure a new base in Asia.