Tuesday, October 29, 2013

Tiger Airways: Growing pains to sustain (OCBC)

Tiger Airways:
Fair value S$0.55
add: 12m dividend forecast S$0.00
versus: Current price S$0.56

Growing pains to sustain
• Weaker than expected set of 2QFY14 results
• Associates will require further funding
• Lack of catalysts; downgrade to HOLD

We were disappointed by Tigerair’s (TR) 2QFY14 results, which showed a larger operating loss (S$12.8m vs. S$11.5m in 2Q13) due to higher operating costs.
Performance by its associate airlines during the quarter was also weak with overall losses at almost S$24m (S$26.6m in 1Q14; S$3.8m in 2Q13), and that lead to an erosion of gains from the disposal of 60% interest in Tigerair Australia. Although there were some seasonality factors at play, the lack of demand traction and competitive fare pressures force us to temper our earlier optimism over TR’s performance for FY14/15. Lowering our FY14/15 net profit projections considerably to account for the growing pains of its associate airlines and the likelihood of depressed passenger yields for Tigerair Singapore in the near-term, we downgrade TR to HOLD with a reduced fair value estimate of S$0.55 (S$0.79 previously).

Disappointing 2Q14 results
Tigerair’s (TR) 2QFY14 revenue fell 16.7% YoY to S$163.8m due to the exclusion of Tigerair Australia (TRA), which had been deconsolidated as of Jul. Nonetheless, despite the 13.8% YoY increase in revenue by Tigerair Singapore (TRS) to S$151.3m, higher unit costs and service charges resulted in lower passenger yields and a widening of operating losses to S$12.8m from -S$11.5m in 2Q13. Losses from TR’s associate airlines also continued, clocking in at almost S$24m for the quarter (-S$26.6m in 1Q14; -S$3.8m in 2Q13). Only with the one-off gain from TRA’s disposal did TR record a net profit of S$23.8m.

More time needed to grow the cubs
We admit that our initial optimism for TR’s associate airlines over the past year was premature. TR’s three associate airlines – Tigerair Philippines (TRP), Tigerair Mandala (TRM) and TRA – still face operational challenges (i.e. lack of demand traction, competitive fare pressures and the absorption of additional capacity) that show little signs of abating. For instance, losses for TRP widened in 2Q14 to S$7.7m despite narrowing losses for the previous three quarters (-S$8.3m in 3Q13; -S$7.m in 4Q13; -S$6.0m in 1Q14). While TR will continue to introduce new routes, we expect pick-up rates to be slow and passenger load factors (PLFs) to stay depressed.

Forecasts reduced; downgrade to HOLD
That said, we lower our FY14/15 net profit projections considerably to account for the growing pains, leaving us with only a smaller overall profit for both years. In the interim, 3QFY14’s seasonal uptick in traffic volume is likely to be negated by capacity expansion (lower PLFs), and fares could remain under pressure due to promotional fares from competitors – even premium carriers – with higher unit costs lowering yields on a YoY basis. Applying a P/B multiple of 1.1x, we lower our fair value estimate to S$0.55 (S$0.79 previously). Downgrade TR to HOLD.

Source/Extract/Excerpts/来源/转贴/摘录: OCBC-Research,
Publish date: 25/10/13

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