Reverse course and move on
Tiger Airways was reported to be in discussions to sell its 40% stake in Tigerair Philippines (TAP) to Cebu Air, a good move in our view as it will take TAP a long time to break even in a tough Philippine market.
Nevertheless, we keep our Reduce call as it may continue to face an uphill struggle in Indonesia, while the core Singapore operations are likely to face overcapacity in the next 6-12 months. We retain our forecasts and target price, still based on 1x CY14 P/BV. Share price de-rating catalysts include likely poor results in the immediate future.
Reversing Davis’s legacy
In the post-Tony Davis era – who was replaced as Group CEO by SIA’s Chin Yau Seng in November 2011 and then by Koay Peng Yen in July 2012 – Tiger Airways has gradually dismantled parts of Davis’s legacy, including (1) a change in the brandname, logo and livery, (2) the sale of 60% interest in Tigerair Australia to Virgin Australia, and now (3) a proposed exit from TAP. These are all moves in the right direction for its shareholders, as loss-making businesses are sold to airlines that are more likely to make them work.
The proposed TAP sale will also enable Tiger Airways to avoid accounting for further losses from TAP. Our FY14 and FY15 forecasts for Tiger Airways incorporate a S$20m and S$15m loss estimate, respectively, from its associate share in TAP. It can also concentrate on its 32.5% stake in Tigerair Mandala and its proposed 10% investment in Tigerair Taiwan, as well as build links between Tigerair Singapore and sister company Scoot, India’s SpiceJet and other partners.
Tiger Airways can also recover, partially or wholly, its investment in TAP. We estimate that Tiger Airways will book in a total of S$50m for its 40% share of TAP losses from the time the stake was purchased in August 2012 up to March 2014, and if it recovers one-quarter of this, it will receive S$12.5m from the disposal of TAP. Hence, we estimate that its end-CY14 book may be enhanced to S$0.50, up 6% from S$0.47 currently.
We believe that the existing three A320s deployed by TAP in the Philippines will be redeployed to Tigerair Mandala in Indonesia to generate further growth. Another two A319s are currently being used by TAP, and we are unclear what Tiger Airways intends to do with them.