Disappointing quarter for Tiger Airways: DMG & Partners Research

Below is the highlight from DMG's research note on Tiger Airways May 23, 2011.

4QFY11 net profit of S$1.3m (-94% yoy) was below ours and consensus expectations. FY11 net profit of S$39.9m (+42% yoy) is 26% below expectations. This is largely due to: 1) S$6.5m in deferred tax asset reversal, 2) Weak demand in Australia following the aftermath of the Queensland floods and; 3) Aggressive fare discounting to entice demand in Australia. FY11 net profit of S$46.4m (excluding deferred tax) is 14% below expectations. Management intends to deploy all net nine new aircraft deliveries in FY12 to Asia. Tiger Australia suffered A$15m in direct losses from the floods, resulting in operating losses of A$9m and we believe demand could remain dampened following a recent show cause letter by CASA over possible safety breaches.

Headwinds in Phillipines, uncertainty in Thailand: Manila’s CAB has issued a cease and desist order halting SEAIR’s planned domestic flights between Manila to Cebu and Davao following joint complaints by four of Tiger’s competitors accusing the latter of violating cabotage laws. SEAIR has been given 30 days to prove it is not in violation but international routes remain unaffected. As for the future of Thai Tiger, things remain in the dark until after the Thai elections which is set for 3 July.

33% in Indonesian Mandala Airlines. Tiger has signed a term sheet to acquire a 33% stake in Indonesian Mandala Airlines, which is currently undergoing financial restructuring. Mandala has been gounded since January following a court order to undergo a financial restructuring to convert Rp2.4trillion of its debt into shares. The Saratoga Group will own the majority with 54% while existing shareholders and creditors will own the remaining 16%. We think the Indonesian domestic market is overcrowded but management has let on that it intends to focus on international routes within a five hour flying radius of the country, in particular between Singapore and Indonesia.

Downgrade to NEUTRAL with revised TP of S$1.40. With rising headwinds and uncertainty in its regional expansion, we take a cautious stance to assume a lower aircraft utilisation rate, lower ticket fares to entice demand, cutting our FY12 earnings estimates by 15%. Downgrade to neutral with TP of S$1.40, pegged to unchanged 12x FY12F EPS. Key re-rating catalysts include: 1) More clarity over its Thai Tiger venture, 2) Clearance from Manila CAB over its domestic routes, 3) Progress on its Indonesian acquisition and 4) Improvement in demand in Australia.