Turnaround on track
- 1Q16 EBIT of S$0.6m vs. loss of S$16.4m in 1Q15; net loss of S$1.7m is a substantial improvement from S$65.2m loss a year ago
- Performance is slightly below our expectations but turnaround remains on track
- Lower fuel costs and higher yields to drive a stronger 2HFY16 for Tigerair
- Maintain BUY, S$0.42 TP
Highlights:
Much better 1Q16.
- Tigerair reported 1Q16 numbers that were a huge improvement from last year’s with an operating profit of S$0.6m vs a loss of S$16.4m in 1Q15.
- However, this was below our expectation of S$9.5m operating profit mainly due to:
- slightly lower yields and
- lower load factors than expected.
- In terms of net profit, Tigerair posted a loss of S$1.7m vs a loss of S$65.2m a year ago, due to the better operating performance while last year’s numbers also included S$35.3m in losses from associates and S$14.6m relating to shutdown costs of Mandala Airlines (Indonesia).
Flat revenues, lower fuel costs.
- At the revenue line, 83.5% load factor was recorded (vs. our assumption of 86%), which was 1.2ppts lower than 1Q15 while yield improved by 4.7% y-o-y to 6.7Scts per RPK (slightly below our assumption of 6.86Scts), resulting in revenue of S$168.3m (-2% y-o-y) as capacity was reduced by 7.2% y-o-y.
- On the cost front, actual fuel costs were lower by 36% y-o-y or c. S$29m but this was offset by fuel hedging losses of c. S$11.3m.
- While MRO and depreciation and amortisation charges were higher due to changes in accounting policy, other costs were largely lower, reflecting good cost discipline.
Outlook:
Stronger 2H outlook on lower fuel costs.
- Looking ahead, the quarter ending Sep (2Q16) will be seasonally weak for Tigerair but we expect a much stronger second half for the carrier, primarily as fuel costs will be much lower.
- Tigerair has hedged about 40% of its fuel requirements for the next 15 months at US$87/bbl vs the current price of c. US$70/bbl and our assumption of US$ 90/bbl.
- We hence maintain our forecasts, S$0.42 TP and BUY recommendation.
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//EBITDA) is for the airline to deliver sustained earnings improvement.
Key Risks:
Vulnerable to demand shocks.
- Airlines are susceptible to demand shocks, which could include pandemics, terrorist attacks as well as economic crises.
- In Tigerair's situation, it is largely exposed to the economic and demand environment for the S.E. Asia, China and Australia.
Higher fuel prices would hit earnings.
- The Group's razor thin profit margins would be negatively impacted if fuel prices were to climb higher significantly.
- Each US$1 increase in jet fuel price per barrel would decrease the Group's net profit by c. S$2m, all else being equal.
(Paul YONG, CFA)
Source: http://www.dbsvickers.com/
