>TIGER AIRWAYS HOLDINGS LIMITED: Potential merger with Scoot or takeover by majority shareholders SIA and Temasek is possible in the longer term

Ready to take-off after the turbulence; initiate at OW


■  Initiate at OW with Jun-13 PT of S$0.90: Tiger Airways’ (TGR) share price has rebounded by 19% and outperformed the market by 6% ytd, following its 62% decline and 45% underperformance in the past 12 months largely due to the negative impact of Tiger Australia’s suspension and capacity indigestion in FY12E. Although the near-term outlook is challenging and current valuations look unattractive given TGR’s low earnings base, we believe the expected earnings turnaround in FY13 and our c.108% pa net profit growth in FY14-15 has not been priced in. Our PT implies a 22% upside from the current share price.


■  Strong earnings turnaround expected: With the normalization of Tiger Australia’s operations and continued passenger/ancillary income growth, EBITDAR margins are likely to return to c.21% in FY13, similar to the FY10-11 level, after falling to c.5% in FY12, and rise to c.29% by FY15 with greater economies of scale. FY13-15E average c.4% ROA, c.18% ROE and c.7% ROCE are above the Asian airline sector. TGR benefits from the strong financial backing of majority shareholders Temasek and SIA.


■  Other positive drivers: 1) New JVs SEAir (Philippines) and Mandala (Indonesia) could help drive Tiger’s earnings growth and regional franchise in these fast-growing markets. There is upside risk to our forecasts if these JVs turn profitable earlier than expected. 2) Move to Changi Airport T2 could help boost traffic feed given its closer operating proximity to a significantly larger critical mass of airlines. 3) Potential collaboration with Scoot could drive synergies. A potential merger with Scoot or takeover by majority shareholder SIA is possible in the longer term, in our view.


■  Valuation, key risks: Our Jun-13 PT of S$0.90 is based on 11x 12M fwd Adj. EV/EBITDAR, in line with TGR’s historical average valuation since Tiger Australia’s suspension and supported by the recovery of TGR’s EBITDAR margin to 21% in FY13E and 29% by FY15E vs. 20% for sector peers. Key risks: 1) rising fuel prices; 2) Tiger Australia’s recovery stalls; 3)weaker S$; 4) execution risks in SEAir and Mandala JVs; and 5) potential equity-raising to fund aircraft capex if sale & leaseback options become unattractive.


To read report in detail: TIGER AIRWAYS
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