EARNINGS POISED TO TAKE OFF
BUY Tigerair for its earnings recovery story, with >40% upside to our TP of S$0.42.
- We reiterate our view that Tigerair is poised to see its earnings recover firmly this year, driven by higher yields on capacity discipline, and lower jet fuel costs.
- Having jettisoned its loss- making associates and taken painful write-offs, and with the support of parent SIA, we project Tigerair to return to a full-year profit of S$39m and S$55m in FY16 and FY17 respectively, after four consecutive years of losses.
Yield recovery and lower fuel costs to drive profits.
- Tigerair has hedged 40% of its jet fuel requirements from April 2015 to June 2016 at an average of US$94/bbl, which suggests that the Group should see a more significant boost from lower fuel costs ahead, especially from 2HCY2015 onwards.
- At the same time, the shedding of lower-yielding, loss-making routes should also boost overall yields for the carrier, and drive it towards sustained profitability.
Closer relationship with SIA is also a positive.
- Tigerair is also now a 55.8%-owned subsidiary of SIA, and has a closer working relationship with SIA, such as the interline cooperation with Scoot and inclusion in the KrisFlyer programme, should lead to greater benefits in the long run.
Valuation:
- Share price to rebound as earnings recover.
- We believe the key catalyst for Tigerair's share price to rerate towards our TP of S$0.42 (based on 8x FY15/16 EV//EBITDAR) is for the airlines to deliver sustained earnings improvement.
Key Risks to Our View:
Vulnerable to demand shocks and fuel price increase
- Tigerair, like all airlines, are susceptible to demand shocks such as economic shocks or pandemics, e.g. if the MERS situation escalates further and farther, it would impact air travel in Asia.
- Fuel costs account for over a third of Tigerair operating costs and should oil prices spike sharply, it would impact on earnings.
(Paul YONG CFA)
Source: http://www.dbsvickers.com/
