TIGER AIRWAYS HOLDINGS LIMITED
Tigerair
J7X.SI
Tigerair (TGR SP) 2QFY16: Weak Results But Lower Fuel Cost To Drive Profitability In 2HFY16
- Tigerair surprised with higher-than-expected maintenance costs despite showing improved pricing power. Moreover, Tigerair has guided that higher maintenance costs would continue into 2018.
- However, we believe that low fuel prices and narrowing hedging losses are likely to push Tigerair back into the black in 2HFY16.
- We cut our FY16 and FY17 net profit estimates by 27% and 8% respectively.
- Maintain HOLD with a revised target price of S$0.310.
- Suggested entry level at S$0.28.
WHAT’S NEW
Earnings below expectations as maintenance costs spike.
- Net loss was more than double our estimate as maintenance costs rose by S$9.1m (50% yoy). Tigerair cited an aging fleet and US dollar-linked charges on maintenance costs as key reasons for the increase in cost. We also reckon that Tigerair would have performed relatively costly “C” checks during the period. In addition, leasing costs rose 10% qoq due to a stronger US dollar, while fuel hedging loss of S$13.3m was largely in line with our estimates.
Tigerair guides for higher maintenance costs in the coming years.
- Specifically, engine-related maintenance costs are expected to lead to a S$0.6m increase in maintenance costs per aircraft, which should lead to about S$14.0m in incremental costs in FY17.
Key positive - Continued pricing power.
- Average fares rose 7.6% yoy in 2QFY16, which is admirable given the tough operating environment and weak regional currencies. Tigerair is also adding capacity to its China and India routes over the next two quarters which is a sign of increased confidence.
Likely to have added fuel hedges in 2QFY16.
- Tigerair guided that it has hedged 49% of its fuel requirements until Dec 16 at US$76.15/bbl. This compares favourably to the previous average of 40% hedging at US$87/bbl from Jul 15- Sept 16.
STOCK IMPACT
Tigerair is likely to return into the black in 2HFY16.
- Given Tigerair’s guidance on increased quantum of hedges, which we believe is likely to be front-loaded, fuel hedging losses are likely to narrow. In addition, average fares are likely to rise again in 2HFY16.
- We have assumed a conservative 6.3% yoy increase for the period, due mainly to a low base. Based on these scenarios and a 5% yoy rise in into-plane cost vs 2Q, we expect Tigerair to report operating profit of S$56m, of which S$40m is expected to be due to fuel cost savings.
Profitability largely dependent on continued pricing power and low fuel prices.
- Tigerair could potentially increase its fuel hedging to lock in prices, but this could backfire if fuel prices deteriorate further. Overall, we believe that much of the anticipated improvement in profitability were due to factors outside out of Tigerair’s control.
EARNINGS REVISION/RISK
- We lower our FY16 net profit forecast by 27% as we raise our maintenance cost estimates.
- We also lower our FY17 net profit estimate by 8% after factoring in higher maintenance costs but lower fuel costs.
VALUATION/RECOMMENDATION
Maintain HOLD.
- We continue to value Tigerair at 13x FY17F P/E and trim our target price to S$0.310 from S$0.315.
- We remain neutral on Tigerair and we maintain our HOLD recommendation with a suggested entry price at S$0.28.
K Ajith
UOB Kay Hian
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Sophie Leong
UOB Kay Hian
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http://research.uobkayhian.com/
2015-10-26
UOB Kay Hian
SGX Stock
Analyst Report
0.310
Down
0.315
