KUALA LUMPUR, May 22 — OCBC Research has maintained its SELL rating on Tiger Airways Holdings and cut its target price from 97 sen to 77 sen — despite Tigerair appointing SIA veteran Lee Lik Hsin as CEO on May 12 — because of intense competition and overcapacity.

To overcome this situation, it divested stakes in loss-making Tigerair Australia and Tigerair Philippines in FY14.

It is also re-assessing its stake in Tigerair Mandala.

It is cutting back on capacity by postponing orders for nine A320s to 2018 to 2025, from 2014 and 2015 earlier.

Tigerair expects yield and load factors to remain under pressure due to over-capacity in the region.

To reduce the impact, it will cut costs and try to improve yields.

Meanwhile, Tigerair Taiwan, in which it holds 10 per cent, will start operating by the end of 2014.

The company just announced earnings for FY14:

Revenue: -15.3 per cent to S$734 million

Operating profit (loss): (S$52 million) vs S$7.3 million

Profit (Loss): (S$223 million) vs (S$45.4 million)

Losses relating to associates & JV: (S$95.1 million) vs (S$27.5 million)

One-off gains/losses: (S$81.5 million) vs (S$7.1 million)

Gain on loss of control of a subsidiary: (S$106.1 million) vs Nil

Impairment of associates: (S$133.6 million) vs (S$7.1 million)

Loss on disposal of Tigerair Philippines: (S$28.9 million) vs Nil

Provision for onerous aircraft leases: (S$25 million) vs Nil

Cash flow from operations: (S$82.7 million) vs S$91.4 million

The contraction in revenue was mainly due to the exclusion of Tigerair Australia, as the airline ceased to be a subsidiary in July 2013.

1. Can the new CEO put the roar back into Tigerair?

Tigerair appointed SIA veteran Lee Lik Hsin as CEO on May 12, replacing Koay Peng Yen.

However, Mr Koay will serve as an advisor to the board and remain as a Non-Executive Board Director until the annual general meeting in July.

He spent more than two decades in the maritime industry and was then recruited in August 2012 to provide leadership and strategic skills to the airline.

Lee has served on the Tigerair board as a representative of SIA.

Slide 20 of the Q4 FY14 presentation highlights the turnaround plan but the question is how soon can the new CEO make the airline profitable?

In addition, Tigerair has burnt about S$2 billion of cash since 2010.

Even if we adjust for proceeds from sale of disposal of properties it still has a FCF negative of S$571.5 million.

2. How much loss will it book for selling its stake in Tigerair Mandala?

Tigerair highlighted that it is re-assessing its investment in its Indonesian associate, Tigerair Mandala.

It invested about US$22.6 million in 22.6 million Class C shares or 33 per cent stake.

Its share of loss in Tigerair Mandala was S$55.5 million in FY14 and S$8 million in FY13.

It also says that the cumulative share of loss relating to Mandala which has not been recognised by the group amounted to S$13.3 million in FY13 and S$1.5 million in FY12.

This is because the group’s share of loss has exceeded its net investment.

But the unrecognised amount for FY14 is still unknown because the filing says the cumulative share of loss of S$3.4 million relates to an associate and a joint venture.

Investor Central was concerned about its Indonesian operation and hence had asked a question to the management earlier in January this year: Is Indonesian “cub” next?

3. Will it be able to sub-lease its aircraft at market rates?

The group is grounding five of Mandala’s nine A320s and three of the five aircraft being returned from Tigerair Philippines in FY15.

It made a provision for onerous contract relating to these aircraft which amounted to S$25 million.

The provision is estimated on the basis that the aircraft are expected to be subleased during the period when the group has excess capacity.

The aircraft will be redeployed to the network after the sublease period.

The sublease rate is estimated to be current market rate.

4. How much improvement can we expect in margins while it tries to save cost?

5. What is the targeted capital structure going forward?

Its debt-to-equity has fallen from peak of 2.59x in FY13 to 1.29x in FY14.

Given below is the snapshot of Tigerair’s financials since its listing in 2010.

It reflects that Tigerair has a long way to go before it sees any profits.

6. Does it plan to raise more money in FY14? If yes, then which route will it opt for?

Now that it has lower gearing, debt seems to be a feasible option.

7. If it plans to raise cash, what will it use the money for?

8. Does it plan to sell its remaining 40 per cent stake in Tigerair Australia?

It has sold down 60 per cent.

9. Is Tigerair Singapore showing signs of weakness?

Tigerair Singapore reported an operating loss of S$58.6 million versus an operating profit of S$57.1 million last year.

This was mainly the result of 9.9 per cent weaker yield, and 6.2 per cent-points lower load factor at 78.1 per cent.

Unit cost remained relatively constant.

Revenue from Tigerair Singapore grew 4.7 per cent to S$639.2 million while expenses went up by 26 per cent to S$697.8 million.

The 26 per cent increase in operating expenses was in line with the 25.5 per cent growth in capacity during the year.

10. Can revenues grow faster than expenses in FY15?

Tigerair earns most of its money from Singapore and Australia.

Its average revenue since FY10 is about S$665.4 million while expenses, excluding foreign exchange, deprecation and other, is about S$626.2 million.

11. Will it book any exceptional charges in FY15?

According to our calculation, Tigerair has accounted for about S$90.9 million of exceptional charges since its listing in 2010.

These include gain on loss of control of a subsidiary, impairment of associates, loss on disposal of an associate, loss on disposal of aircraft, provision for onerous aircraft leases and foreign exchange gain/(loss) on borrowings.

12. Can it escape from the watch-list status?

An announcement by Tigerair on May 2 states that it could on the Singapore Exchange watch-list status.

This would happen if it incurs pre-tax losses, excluding one time charges/income, for the previous three consecutive years.

Tigerair has incurred pre-tax loss of S$143.1 million in FY14, S$37.4 million in FY13 and S$94.6 million in FY12.

This is after adjusting for non-recurring expenses of S$79.9 million in FY14, S$37.4 million in FY13 and S$94.6 million in FY12.

Second criteria is that average daily market capitalisation of less than S$40 million over the last 120 market days on which trading was not suspended or halted.

But Tigerair’s market capitalisation of about S$429 million is far above S$40 million.

13. How will Singapore Airlines react if Tigerair comes under watch-list status?

SIA is the major shareholder of Tigerair with 40 per cent stake.

And given that the airline is not making money since its listing in 2010, the chances are high that SIA may take it private.

Its stake can go up to 53 per cent in the company’s enlarged share capital of 1.3 billion shares on issue assuming that SIA, Temasek Holdings, Dahlia Investments and Aranda Investments, the SIA Concert Party Group, exercises and converts the convertible securities into shares and no other holders of either convertible instruments, rights to subscribe for shares or options in shares, exercise, subscribe or convert into shares.

Under the whitewash resolution passed on March 22, 2013, the SIA Concert Party Group will convert their convertible securities before April 2018.

So, does it mean that SIA may take Tigerair private before 2018 or before it gets put on the watch-list?

We have sent these questions to the company to invite them for an on-camera interview, and/or seek their written response.

So far, we have not had a reply (which is why you are seeing this message). — Investor Central

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