Maintain HOLD with target price $1.95
Tiger Airways reported S$1.9m earnings in 1Q11, a turnaround from a S$6m loss in 1Q10 but significantly lower than both consensus and our expectations. Stripping out the forex loss would lead to S$7.6m in profits, but even that number pales in comparison to consensus expectation of S$78m earnings in FY11.
-Revenue in line with consensus expectations. Tiger’s revenue grew 45% yoy in 1Q11, thanks to 18% yoy growth in RPK (revenue passenger kilometre, a measure of sales volume) and 23% yoy growth in yield (price). The latter is impressive, in our view, given stiff competition in Australia where Tiger operates nine of its 19 aircraft. 1Q11 revenue of S$145m amounts to 21% of full-year Bloomberg consensus estimate, which we would describe as ‘in line’, given the April-June quarter is typically the weakest for Tiger (it is winter time in Australia, resulting in less travel).
-Costs are racing up. However, Tiger’s operating cost in 1Q11 was substantially higher than we expected. Cost per ASK (a measure of unit costs) increased 17% yoy to S$ 6.38, compared to S$ 5.74 that we pencil in for FY11. Repair and maintenance costs (up 18% yoy), fuel costs (up 20% yoy) and airport and handling charges (up 53% yoy), all contributed to this higher-than-expected cost performance.
-Maintaining our recommendation and target price. Tiger’s 1Q11 results were weakened further by the AUD weakening in that quarter. Stripping the forex effect would result in 1Q11 earnings of S$7.6m, still just 9.8% of full-year consensus earnings forecast of S$78m. Therefore, we expect Tiger’s stock price to weaken on the back of this news. We retain our S$1.95 target price and Hold recommendation.
-THAI Tiger is not a decisively positive development, in our view. Earlier this week, THAI Airways and Tiger announced the launch of THAI Tiger, a budget airline to be based in Bangkok and slated to start operations in by March 2011. The news received positive reaction from the market, but we believe some critical questions (eg, whether THAI Airways will allow this new venture to profit at the expense of its existing operations) need to be answered before we arrive at a definitive verdict of its impact on Tiger’s valuation.
Source: RBS
