Share Price S$ 0.52
Target Price S$ 0.58
Unveils Bold Initiatives; Upgrade To HOLD
We are enthused by Tigerair’s plans to diversify out of Southeast Asia into North Asia. While capital investment is low, it will substantially lower the balance sheet risk associated with excess fleet and falling residual value. More importantly, plans to jointly market parallel routes with Scoot could lead to better pricing power and cost savings. We thus raise our fair value by 35% to S0.58. Upgrade to HOLD. Entry price: S$0.50.
• Entry into the North Asian market via a NT$2.0b (S$85m) JV agreement with China Airlines. Tigerair Taiwan plans to operate out of Taipei and fly to China, Japan, Korea and Southeast Asia. Tigerair will have a 10% stake in the JV, or S$8.5m, as it opts for an asset-light strategy in expanding its footprint. Queried on its relatively small stake in the JV, CEO Kway Peng Yan indicated Tigerair could raise its stake upon further discussion but foreign ownership will be limited to just 49%. Ticketing and marketing of flights will be via Tigerair.com, for which it will receive a marketing fee. In addition, Tigerair will receive a brand licensing fee. Tigerair will initially lease some of its aircraft to the JV and will thus receive lease income. There is also the possibility for Tigerair to sell some of its aircraft to the JV, further reducing the stress on its balance sheet. The JV expects to commence operations in late-14 and will have a fleet of 12 aircraft over a 2-3 year period.
• Interline with SpiceJet. There is no financial consideration for the interline but fees will be negotiated between the two parties. With Hyderabad as a gateway, Tigerair will provide baggage connectivity to 14 destinations in India from 1 Jan 14, while SpiceJet will benefit from Tigerair’s regional connectivity, particularly to Australia.
• Proposal to expand alliance agreement with Scoot. Pending approval by the Competition Commission of Singapore (CCS) for anti trust immunity, Tigerair and Scoot plans for joint operation, sales and marketing of parallel routes. It appears SIA is seeking to reduce competition between the two carriers and this almost tantamount to joint operation. It remains to be seen how effective this would be as both carriers operate different aircraft with differing product offerings. However, there is no denying that Tigerair’s pricing power would improve substantially if both parties jointly operate.
• JV with China Airlines is positive but unlikely to materially boost earnings. Lowcost carriers’ (LCC) penetration on international traffic from Taiwan is relatively low and ideally Tigerair should have invested greater capital in the venture, compared with Southeast Asia associates who face higher LCC penetration. Thus, while we are positive on the JV, we do not expect Tigerair’s earnings to receive a material boost, given its minor 10% stake in the venture. Still, balance sheet risk and residual value risk could be lowered by leasing or selling aircraft to the JV.
• Interline with SpiceJet should boost loads to and fro India. The move to tie up with SpiceJet should see an immediate increase in loads. Including Hyderbad, Tigerair flies to six destinations in India. As loads improve, Tiger could increase its frequency.
• Last but not least, Tigerair’s alignment with Scoot will remove excess capacity. If CCS approves the joint marketing and sales of parallel routes, the reduced competition should lead to better pricing and yields. Both Tigerair and Scoot fly to Hong Kong, Bangkok, Taipei and Perth, and capacity on these routes can be better managed to reduce competition. We reckon these routes would account for 12-14% of seat capacity. Joint marketing and advertising could also lead to lower operational costs.
• We have not adjusted our earnings forecasts.
• Upgrade to HOLD. We are encouraged by Tigerair’s plans to diversify operations out of highly competitive Southeast Asia into North Asia and India. Ideally, we would have liked to see greater capital injection into the Taiwanese JV, given the relatively low LCC penetration. Still, the change in focus suggests Tigerair is no longer depending on its Philippines and Indonesian JVs to drive growth. The risk profile has also somewhat declined as Tigerair will be able to lease or sell some of its aircraft to the Taiwanese JV. We now value Tigerair at 1.2x FY14’s book value including perpetual securities (previously 0.9x) and derive a fair value of S$0.58. FY14’s book value excluding perpetual securities is S$0.26. Recommended entry level is S$0.50.
SHARE PRICE CATALYST
• Approval of joint sales by CCS.
Publish date: 17/12/13