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DBS Group Research 2015-07-14: Tiger Airways - EARNINGS POISED TO TAKE OFF. Maintain BUY.

EARNINGS POISED TO TAKE OFF 


BUY Tigerair for its earnings recovery story, with >40% upside to our TP of S$0.42. 

  • We reiterate our view that Tigerair is poised to see its earnings recover firmly this year, driven by higher yields on capacity discipline, and lower jet fuel costs. 
  • Having jettisoned its loss- making associates and taken painful write-offs, and with the support of parent SIA, we project Tigerair to return to a full-year profit of S$39m and S$55m in FY16 and FY17 respectively, after four consecutive years of losses. 

Yield recovery and lower fuel costs to drive profits. 

  • Tigerair has hedged 40% of its jet fuel requirements from April 2015 to June 2016 at an average of US$94/bbl, which suggests that the Group should see a more significant boost from lower fuel costs ahead, especially from 2HCY2015 onwards. 
  • At the same time, the shedding of lower-yielding, loss-making routes should also boost overall yields for the carrier, and drive it towards sustained profitability. 

Closer relationship with SIA is also a positive. 

  • Tigerair is also now a 55.8%-owned subsidiary of SIA, and has a closer working relationship with SIA, such as the interline cooperation with Scoot and inclusion in the KrisFlyer programme, should lead to greater benefits in the long run. 


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//EBITDAR) is for the airlines to deliver sustained earnings improvement. 


Key Risks to Our View: 


Vulnerable to demand shocks and fuel price increase 

  • Tigerair, like all airlines, are susceptible to demand shocks such as economic shocks or pandemics, e.g. if the MERS situation escalates further and farther, it would impact air travel in Asia. 
  • Fuel costs account for over a third of Tigerair operating costs and should oil prices spike sharply, it would impact on earnings. 


(Paul YONG CFA)

Source: http://www.dbsvickers.com/




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