Share Price S$0.495
Target Price S$0.54
Expecting A Weak 3QFY14, But Counterparty Risk Will Be Substantially Lowered
A weak 3QFY14 is likely priced in. Still, Tigerair’s efforts to manage capacity and the recent shift to North Asia have to be lauded as it will be partnering with a much stronger principal than in Southeast Asia. Aside from lowered risk, Tigerair will also receive higher lease income from the new venture. Maintain HOLD. Target price lowered from S$0.58 to S$0.54. Suggested entry level: S$0.47, based on 15% required return.
• Expect disappointing earnings. Tigerair will report 3QFY14 results on 24 January. We expect the airline to post an operating loss of S$15.8m, reversing from 3QFY13 operating profit of S$17.9m. A 9.8ppt yoy decline in loads coupled with weak yields should lead to operating losses. Load factor (PLF) for 3QFY14 was the lowest in three years. Consequently, we expect yields to have remained depressed and assume a 12% yoy decline but a 3% qoq improvement.
• Associate contribution remains a wild card. In 2QFY14, Australian, Philippines and Indonesian associates registered a cumulative loss of S$24.0m and also showed impairment losses of S$48.3m. Tigerair Philippines is likely to show better earnings qoq as PLF improved 9.1ppt in Nov- Dec 13.
• Cash flow will be critical. Tigerair’s divestment of the Philippines unit was aimed at stemming cash burn and as at Sep 13, it would have lost a total of S$98.5m. Post divestment, cash flow is likely to improve. Notably, Tigerair continues to sell and leaseback (SLB) aircraft. For example, in 2QFY14 Tigerair disposed of S$113m worth of assets amounting to 14.5% of PPE. The divestment of Tigerair Philippines and further SLB will improve cash flow. In 1H14, Tigerair registered FCF of S$30.0m despite posting losses.
• Focusing on managing capacity, North Asia offers hope. Given, weak loads out of Singapore, it is imperative that Tigerair deploys capacity to more productive regions. Efforts in deploying excess capacity to Southeast Asian nations have led to further impairment in balance sheet due to steep growth in LCC capacity in the region. Consequently, Tigerair has looked towards North Asia and tied up with China Airlines. Though its equity stake in the venture is relatively small at 10%, Tigerair plans to lease 12 aircraft over a 2-year period and will thus receive lease income as well as management fees. Currently, it leases out seven aircraft to Tigerair Philippines and Tigerair Mandala.
• Fixed cost cover likely to gradually improve. As at 1HFY14, fixed cost cover (EBITDAR/ Lease & Int costs) amounted to just 0.8x. We reckon that this will gradually improve in FY15 and FY16 as more aircraft is leased to China Airlines JV and Cebu Air. (One of the conditions behind the disposal of Tigerair Philippines is that Cebu Air leases three aircraft from Tigerair). We estimate fixed cost cover to rise from 1.0x in FY14 to 2.4x in FY16 as the number of leased aircraft rises from 7 in FY14 to 10 in FY15 and 13 in FY16.
• Marketing partnership with Cebu Air will reduce competition and capacity for Singapore and Philippines route. While not a critical route, partnership between these two carriers will enable the two to better face Lion Air and Air Asia. Tigerair’s proposed joint marketing with Scoot on duplicate routes will also lower capacity out of Singapore and hopefully improve yields.
• We raise FY14 net loss forecast by 176%, as we factor in S$13.5m of additional losses from Tigerair’s divestment of its stake in Tigerair Philippines and a further S$4.5m losses from the same over the next two quarters. We also lower our load factor assumptions by 1.3ppt to 77.7%. We lower FY15 net losses by 11% as we fine-tune our interest expense assumptions.
• Maintain HOLD. We value Tigerair at 1.2x FY14F book value and derive a fair value of S$0.54. Recommended entry level is S$0.47, based on a 15% required return.
SHARE PRICE CATALYST
• Higher aircraft leases.