Tiger Airways Holdings Limited - Seeking some love from its parents (CIMB)

UNDERPERFORM Maintained

S$0.96 Target: S$0.54

Mkt.Cap: S$521m/US$432m

Airlines

First cash call after IPO

Tiger will be issuing up to 273.4m new shares at S$0.58 apiece in a 1-for-2 rights issue, or a 39% discount to its last traded price of S$0.955. We are not surprised by this news. On 8 Aug 11, we had warned of a potential cash call to shore up Tiger’s weak balance sheet. Major shareholders SIA and Temasek will be taking up 90% of the rights. We see possibly greater involvement from parent SIA as a long-term positive for Tiger. In the near term, Tiger should continue to bleed in Australia. Pending an analysts’ briefing later, we keep our earnings estimates, Underperform rating (with de-rating catalysts still expected from a slower-than-expected turnaround in Australia) and target price of S$0.54, based on 8x CY12 EPS. Tiger’s theoretical ex-rights price will be S$0.83. Adjusting for the issue, our ex-rights target price would be S$0.46.

The news

1-for-2 rights issue. Tiger will be issuing up to 273.4m new shares at S$0.58 apiece, representing a 39% discount to its last traded price of S$0.955. According to company disclosures, majority shareholders, SIA and Dahlia Investments (Temasek’s investment arm) will be taking up 90% of the issue collectively. The rationale for raising capital is: 1) to strengthen its balance sheet by lowering leverage; and 2) fund aircraft-delivery payments. The rights issue should be completed by mid-November.

Comments

Stronger SIA presence in Tiger now. SIA will be subscribing to around 81.8% of the rights. Following that, its stake in Tiger would rise from 32.8% to 49.1% of the enlarged share capital. According to SIA’s disclosures, this signifies SIA’s commitment to supporting Tiger.

Lower gearing. Following the rights issue, Tiger’s net gearing would drop from 2.76x to around 0.95x.

Reduced risk of aircraft delivery delays, for now. Part of the proceeds will be used for pre-delivery and final-delivery payments for its committed aircraft orders through 2015. In our view, this lowers risks of aircraft cancellations or deferment in the near term, as a stronger balance sheet eases securing pre-delivery payment and aircraft financing. However, risks of aircraft delivery cancellations or deferment remain as long as Tiger is unable to secure a new base elsewhere in Asia.

Widening gap with peers. Tiger appears to be struggling to catch up with AirAsia and Jetstar. Since Tiger’s time-out in Australia, AirAsia has set up AirAsia Philippines and Jetstar is moving into Japan. We have yet to hear of further developments in Tiger’s plans to set up bases in Thailand, Indonesia or the Philippines.

Valuation and recommendation

Maintain Underperform. We maintain our Underperform rating and target price of S$0.54, still based on 8x CY12 EPS, the industry’s 4-year historical forward average. While a stronger SIA presence could be a long-term positive for Tiger, near-term uncertainties remain in Australia. In addition, we see a widening gap with peers, as plans to secure a new base in the Asia Pacific have failed to take shape.