TIGER AIRWAYS HOLDINGS LIMITED
J7X.SI
Ready (Again) For Take Off
- We resume coverage on Tigerair with a BUY and SGD0.32TP (17% upside), well supported by earnings recovery after four years of losses.
- After ridding off loss-making overseas operations, rationalising fleet size and booking significant one-time losses in the past two years, it is ready to book SGD22m in FY16 earnings, aided by higher yields on capacity discipline, better load factor and lower jet fuel costs.
The worst may be behind us.
- Tiger Airways (Tigerair) reported losses for four years, driven by the poor performance of its overseas affiliates. However, it has now withdrawn from all loss-making overseas ventures and has sold or sub-leased surplus aircraft that were returned to the group by the overseas affiliates to ensure that Tigerair’s core Singapore operations become profitable.
Recovery aided by yield improvement and lower fuel costs.
- Aided by the capacity discipline installed by the airline after the removal of surplus aircraft, Tigerair should witness an increase in yield and load factor over the next two years. As the group has hedged 40% of its fuel needs for the next 15 months at USD87/barrel (bbl), net fuel price paid by the airline is likely to be higher than spot prices.
- However, Tigerair would still benefit from YoY decline in fuel costs, which account for 40% of total operating costs.
Benefits of being Singapore Airlines’ (SIA) (SIA SP, NR) baby.
- We believe that SIA becoming Tigerair’s largest shareholder and parent is one of the key elements for its turnaround and future sustainable growth. The airline would not only benefit from its parent’s scale and network connectivity (as well as those of its affiliates), but also gains on cost and operational efficiencies by building a deeper cooperation with Scoot Pte Ltd, SIA’s budget medium- to long-haul carrier.
Valuation.
- Our SGD0.32 TP is based on 6x 2016F EV/EBITDA, slightly below peer average multiple.
- Our TP implies 2.8x 2016F P/BV, ie just below Tigerair’s historical mean since listing. Based on adjusted EBITDAR, the implied 6.9x 2016F EV/EBITDAR is a slight premium to peers.
Key risks to our rating:
- downturn in air travel demand from macroeconomic events,
- a slowdown in Singapore’s economic growth,
- rise in jet fuel prices,
- weakness in the SGD, and
- equity raising in case of losses.
Shekhar Jaiswal | http://www.rhbgroub.com/ RHB Securities 2015-09-15
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