Share Price S$0.575
Target Price S$0.550
Too Early To Be Optimistic
August operating data indicates that capacity growth is outpacing demand and market expectation of an earnings recovery could be misplaced. Performance of associates is also unlikely to fare better with loads remaining weak and higher fuel prices. Maintain SELL; unchanged target price of S$0.55.
• Optimism of earnings recovery is misplaced. Tigerair rose 5% post release of August operating statistics. We believe that the market viewed the absence of Tigerair Australia's operating stats as a sign that the former wholly-owned subsidiary will no longer be a drag on earnings. 60% of the unit was divested to Virgin Australia on 8 July, which will lead to partial losses. Still, a weak Australian dollar and higher fuel prices during the period will lead to associate losses.
• Other associates are unlikely to fare better. Tigerair for the first time provided monthly load factors for Tigerair Mandala (74%) and Tigerair Philippines (70%), which were well below Singapore’s (78.5%). The relatively weak loads suggest that both associates will continue to be in the red.
• Tigerair Singapore's August load factors are lowest since Jan 12. Pax traffic rose 23% while capacity grew by a higher 30% in August. This resulted in a 4.7ppt decline in loads, the lowest load factor since Jan 12. The number of pax carried grew 19%, which shows that Tigerair was carrying passengers on longer distances. Ideally, ticket prices should rise to compensate for the higher sector lengths. However, we remain doubtful about Tigerair's ability to raise fares as the previous quarter showed a lack of pricing power. In 1Q13, fares stayed constant and yields fell 5% in the wake of a S$6 increase in passenger service charge (PSC) by Changi Airport.
• Higher fuel costs. The lack of pricing power coupled with higher fuel costs in July and August (2.6% higher than in 1QFY14) would also impact margins. Fuel accounted for 40% of total operating costs in 1QFY14.
• Will 2QFY14 fare better? We think not. In 1QFY14, yields fell 5% and Tigerair Singapore reported an operating profit of S$5.9m. During the period, Tigerair Singapore achieved a passenger load factor (PLF) of 83.9%. Loads for 2M were a whopping 4.7ppt lower. Thus, unless fares rise substantially, 2QFY14 earnings will likely disappoint.
• Valuations still not cheap. At current price levels, Tigerair is trading at 1.5x 2013F P/B compared with AirAsia’s 1.3x P/B and the industry average of 1x P/B. As AirAsia has better pricing power, it successfully implemented fuel surcharges to defray fuel costs. Thus it would be our preferred pick in the LCC space, especially if it has increased its hedging on its US dollar-denominated debt.
• What would change our mind? Tigerair has rebranded itself as a more customer friendly airline and has aligned itself with National Trades Union Congress (NTUC). While this will increase brand awareness with the potential for higher market share, we would like to see that supplemented by fuel surcharges. Several other LCCs have successfully adopted such a strategy and raised revenue. Until, we see that, we believe that there is limited scope for Tigerair to achieve operating efficiency from volume alone.
• No change.
• Maintain SELL with unchanged target price of S$0.55, valuing the stock at 1.4x FY14F book value, excluding perpetual securities.
Share Price Catalyst
• Better performance from associates.
• Load factor improves and yield picks up.
Publish date: 16/09/13