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UOB Kay Hian Research 2015-07-23: Tigerair - 1QFY16 Pricing Momentum Slows And That Presents The Greatest Risk. Maintain HOLD.

1QFY16: Pricing Momentum Slows And That Presents The Greatest Risk 


  • 1QFY16 annualised earnings were substantially below consensus estimates, but this was due to relatively higher fuel hedges for the quarter. 
  • Over the next few quarters, both quantum and level of fuel hedges will decline, which will boost earnings. 
  • The ability to maintain pricing power is a key uncertainty and is contingent on competitors’ capacity addition. 
  • Maintain HOLD. Target price: S$0.315. Suggested entry level at S$0.28. 


• Below expectations on an annualised basis but there is scope for improvement. 

  • The increase in ASP did not offset the decline in pax traffic (RPK), which resulted in lower top-line and earnings. 
  • Consensus expects full-year net profit of S$44.0m for FY16 and implicit within this forecast is: 
    1. improved pricing for the rest of the quarters, or 
    2. lower fuel cost. 
    We reckon the latter is likely. 
  • The momentum of ASP increase has slowed from an average of 17% for the past two quarters to 6.8% for the current quarter. 

• Expecting lower jet fuel cost for the next three quarters. 

  • 1QFY16 average into-plane fuel price is estimated at US$74/bbl, which is a premium to the current 1-month forward of US$67/bbl. In addition, there was an S$11.3m fuel hedging loss, which implies net fuel cost of about US$90/bbl for the quarter. 
  • This is likely to decline in the coming quarters as both the quantum and absolute amount of hedges narrow. 

• Pricing could have been stronger were it not for Jetstar’s aggressive capacity expansion and weaker regional currencies. 

  • While Tigerair, which has the highest LCC share at Changi, has been cutting capacity, its second-largest LCC competitor Jetstar Asia has been aggressively raising capacity since the start of the year. This could have curtailed some of the ASP growth. 
  • Next, weak Indian and Indonesian currencies could also have impacted yield on return flights. 
  • In fact, Tigerair’s largest capacity in km terms is towards India. 


STOCK IMPACT 


• Expects recovery momentum to continue; but most of the ROE accretion largely dependent on ability to raise ticket prices. 

  • We estimate Tigerair will record 21% ROE in FY16 on the back of higher ticket prices and lower fuel cost. 
  • We have assumed average net fuel cost of US$82/bbl and a 3.5% rise in ticket prices (1QFY16: +6.8% yoy). A 1ppt increase in ticket prices from our base assumption will raise net profit by a whopping 51%. 
  • Given weaker Indonesian and Malaysian economies, we are less confident of continued pricing power and have thus assumed growth in ticket prices will slow in the coming quarters. 


EARNINGS REVISION/RISK 


  • We raise our FY16 net profit forecast from S$25.0m to S$51.0m, mainly due to an 8% reduction in our fuel cost assumption for FY16. 
  • Our FY17 estimate is also raised by 13% on the back of lower fuel cost assumption. 
  • A recovery in fuel prices and the weakening macro environment remain the biggest risks. 


VALUATION/RECOMMENDATION 


• Maintain HOLD. 

  • We had previously valued Tigerair at 14x FY17 earnings but we lower this to 13x FY17’s. 
  • Much of the positives are already in the price and we believe the region’s huge LCC orderbook will not be conducive for continued pricing power. 
  • Tigerair is currently trading well above 2x FY17F book value. 
  • Maintain HOLD and preferred entry price of S$0.28. The stock is highly levered to fuel prices and improved ASP. 



(K Ajith)

Source: http://research.uobkayhian.com/




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