Friday, November 9, 2012

Tough time ahead for Tiger Airways



Tiger Airways (TGR SP) is a low cost airline based in Singapore and Australia that aims to grow through strategic joint ventures across the Asia Pacific. Tiger Airways is making all efforts to increase its fleet size to 68 by the end of 2015. 

COLLABORATION ADVANTAGES AND DISADVANTAGES
Tiger Airways has moved to Cheng’s Airport Terminal 2 following the closure of the Budget Terminal in Singapore. There are many positive benefits such as improved connectivity with links to the rail network and opportunities for collaboration with other airlines. Due to the common operating terminal, Tiger Airways and Scoot signed a partnership agreement to offer joint itineraries in Singapore. This collaboration is expected to extend in Australia in the long run. This move was widely anticipated and will not affect the prices of TGR SP.

Moreover, the budget airfares in Australia have fallen by 11.8% year on year for the quarter ending September 2012. The sharp decline is exaggerated due to the high base effects due to the grounding of Tiger Australia in the same period. In addition to this, the rise in airport related charges will increase the operating expenses. These increased expenses could be passed onto the customers and could lead to lower demand due to price sensitive nature of the market. It is expected that if Tiger Australia would want to attract customers, it would keep airfares low.

CARBON TAX IMPLICATIONS
The carbon tax regime has been implemented in Australia since July 2012. TGR SP would experience higher operating costs around A$3-A$10, in the range of Virgin Australia (A$1.5-A$6) , Jet star (A$10) and Qantas (A$3-A$6). These costs are expected to be passed on to the consumers, leading to a rise in airfares of almost all airlines. This would lead to a reduction in fares and narrow margins, especially for TGR SP.  

VALUATION
It is expected that there would be a loss in the FY13E. The current valuation (Valuation Multiple: 1.7XFY13E BVPS) of the stock is too high due to another year of expected losses and a further erosion of the equity base. The market focus is on the operational turnaround ignoring the excessive valuation of stock. The stock is being downgraded with a recommendation to sell at a revised target price of S$0.45. 

FINANCIAL ANALYSIS AND RECOMMENDATION               
The revenue and EBITDA (Earnings before Interest, Taxes, and Depreciation) of Tiger Airways have increased in FY13E as compared to previous year and is projected to increase in FY14E as well as in FY15E.  However, the EBIT is negative for FY13E. Net income is also negative (-5) and is expected to continue to be negative till FY15E (-8). Cash flow from investments is also in the red and is expected to remain so. Dividends have not been declared to the shareholders and with decreasing profits, it is not expected that dividends would be declared. Loans are expected to rise in FY14E (242) and FY15E (242) from FY13E (125). While assets are expected to increase, liabilities are expected to rise at a faster rate. It is recommended to sell.

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