The Singapore Airlines (SIA), the only airline stock listed on the SGX will soon have company – its subsidiary, budget carrier Tiger Airways (TA) will be joining its parent company on the SGX Mainboard when it commences trading on Jan 22, 2010.
And this comes on the back of a surprisingly successful IPO that was oversubscribed by 5.7x on average. The strong take-up confounded skeptics despite the fact that TA is loss-making and operates in an industry where return on equity and margins are thin even in boom times. There was even market hearsay that the IPO’s investment bankers should be thanked for doing a great job in selling the Tiger tale.
Indeed, sold at $1.50 (below its indicative price of $1.65), TA’s stock is priced well over 6x its NAV of $0.24 per share. Analysts noted that most regional airline shares were trading at below 1.5x book value. ‘Singapore Airlines is trading at 1.15x book, while AirAsia is trading at 1.2x,’ noted aviation analyst K Ajith of UOB KayHian.
Of the 165.2m shares being sold, 12.4m shares were offered to the public while the remaining 152.8m were acquired by institutional buyers. Should an over-allotment option be triggered due to the overwhelming responses, a further 19.8m shares would be sold by RyanAsia, a company controlled by the founding family of Irish budget airline RyanAir, and thereafter reduces the latter’s holdings in TA from 10.8% to 7.2%.
Amongst its 3 other shareholders, Indigo Singapore Partners has sold down its holdings from 24% to 14.5% by offering 9.6m TA shares on sale in the IPO. The other 2 shareholders, SIA and Temasek Holdings will see their collective shareholdings diluted from 60.0% to 40.5% upon completion of the IPO. The IPO was the first for an Asian airline in almost 5 years.
In a sign of heightened regional battle, TA’s IPO announcement came shortly after main rivals Jetstar and AirAsia unveiled a joint ‘world first’ budget alliance – a non-equity arrangement that could see both companies save hundreds of millions in costs by pooling certain resources such as ground handling services, procuring of new aircraft and carrying each other’s passengers stranded by breakdowns and other disruptions.
Just last year in November, AirAsia also announced plans to list on Thailand’s and Indonesia’s stock exchanges in an effort to elevate its identity from a Malaysian airline to an ASEAN airline.
And it does not help to note that these 2 airlines are bigger than TA: Malaysia’s AirAsia is Asia’s biggest budget airline and currently leads the Asian low-cost market with 62 planes servicing more than 60 destinations; while Jetstar, a subsidiary of Australian flag-carrier Qantas, is the world’s largest long-haul budget carrier with 53 aircraft in operation. Analysts were quoted as saying that they were moving to dominate the growing Asian budget sector and were likely to announce further joint ventures that could potentially cripple TA.
In comparison, TA has only 17 aircraft in operation currently. Hence, it is not difficult to figure out why TA needed the IPO proceeds of $247.8m so badly – to fund its expansion and most notably, ramp up its fleet size to a more respectable level at 68 by 2015.
Budget Air Travel Boom
According to the prospectus, the Asia Pacific region is expected to be the largest air travel market globally by 2020, with air travel projected to grow at an average annual rate of 6.5% between 2008 and 2028, over the global CAGR of 4.9% for the same period.
In Southeast Asia, air travel growth is forecast to grow at an even higher CAGR of 8.1% between 2008 and 2028.
In the Land Down Under where TA has hubs in Melbourne and Adelaide, the domestic travel market is ranked the 4th largest in the Asia Pacific region. The country has a higher propensity to travel per capita than any other developed countries, including the US and UK. Air travel growth forecast for the country is expected to average 5.1% per year over the next 20 years.
Coupled with the anticipation that full liberalisation of most traffic rights within ASEAN might occur by 2015, it is little wonder why the 3 budget airlines, amongst others, are powering up their regional presence so as to draw first blood in their quests for a larger slice of the lucrative pie.
Based on the latest financial results of 1H10 ended Sep 30, 2009, TA is in a net liability position of $106.8m. The company has ended in net liability positions for all its previous 3 FYs – $53.2m (FY07), $38.7m (FY08) and $109.5m (FY09). The predicaments in FY07 and FY09 were attributed to net losses suffered as a result of its Singapore unit being only in its second full year in operation (for FY07) and its Australian unit reaching only its 1st full year in operation (for FY09).
For 1H10, TA managed to reduce its net loss from $25.2m in 1H09 to $8.3m, thanks to a rise in turnover which helped to lessen the impact of an increase in operating costs including a fuel hedging loss of $22m. The improvement in revenue was mainly driven by a 220% jump in ancillary revenue to $41.2m due to company’s efforts to diversify its takings through provision of additional products and services such as in-flight sale of F&B and commissions earned in connection with the sales of travel insurance.
Despite the bleak numbers, TA’s board directors remain upbeat about its ability to generate adequate cash flows to meet the company’s financial obligations as and when they fall due. Much to investors’ relief, approximately $50.4m from the IPO proceeds will be used to clear all outstanding short-term loans, leaving the company virtually debt-free except for the $61.4m outstanding loans which are secured.
The directors’ confidence is further strengthened by bright spots in 2 key performance drivers – a strong growth in revenue, with CAGR of 71.6% from FY06 to $378m in FY09 and a CAGR of 56.2% in passenger volumes during the same period to 3.2m passengers.
Buying On Concept Play
Judging from the overwhelming IPO response, it seems investors are buying in anticipation of an imminent boom in ASEAN budget air travel which is being further fed by constant news flow of regional economic recoveries. And there is not much choice to choose from since TA and AirAsia are the only 2 public-listed budget airlines in ASEAN.
TA’s IPO so far has been déjà vu of AirAsia’s back in Nov 2004 when the latter’s final retail offer price also fell below its initial indicative price and was oversubscribed. AirAsia subsequently opened with a RM0.09 premium at RM1.25 during its first day of trading. As such, it would be interesting to see if TA would follow in the footstep of AirAsia.
AirAsia currently trades at a slight premium to its IPO price of RM1.16