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Breakdown: Tiger Keeping Up With The Pack
Breakdown, Tradeable | 26 March 2013
By: Simeon Ang
Articles (125) Profile

The region’s budget airline industry is poised for a huge shake-up after Indonesia’s largest privately run airline, Lion Air, placed a “blockbuster order” for 234 medium-haul jets from Airbus last week. Anshuman Daga from Reuters opined that the order underlined Lion Air’s ambitious plans to mount a serious challenge to the region’s biggest budget airline, AirAsia Bhd.

Lion Air’s challenge was laid bare when it launched its first service into Malaysia, the home ground of AirAsia. With the pace of expansion reaching fever pitch levels, industry watchers have started to question if the budget carriers were overextending themselves.

Tiger Air – Capital Raising To Fund Expansion
One such budget carrier who would know the pains of such “overextension” would of course be, Singapore-based Tiger Airways. Back in 2007, Tiger Airways announced its plans to become Australia’s third full-scale domestic airline and expand its international presence. But in 2011, those plans came to a screeching halt as authorities down under suspended all domestic flights in Australia over safety concerns.

More recently, Tiger Airways announced plans to divest 60 percent of its stake in Tiger Airways Australia to its domestic competitor, Virgin Australia. Notwithstanding this, Tiger Airways announced that it intends to undertake a capital funding exercise by means of a renounceable Rights issue (i.e. entitled shareholders can take up or sell the rights) as well as an issue of non-renounceable (entitled shareholders cannot sell the rights) Perpetual Convertible Capital Securities (PCCS, more on this later).

Let us see what analysts have to say about this development and Tiger Airways as a whole.

CIMB’s Call
Daniel Lau and Raymond Yap of CIMB felt that the “surprising” cash call (by the way, the second such capital raising exercise in 18 months) was a negative implication on the counter’s share price in the near term. They go on,

“… is a necessity to plug associate’s cash burn and improve its balance sheet.”

Daniel and Raymond go on to say that,

“We expect price weakness in the coming weeks as Tiger’s share price gravitates towards its theoretical ex-rights price of $0.674. Tiger’s associates’ outlook appears bleak and we anticipate further cash burn in the coming quarters.”

Daniel’s and Raymond’s Call: UNDERPERFORM, with target price of $0.63 (potential downside of 10 percent*)

This call perhaps underlines the pressures that Tiger Air faces in its two new associates, namely, Indonesia’s Mandala Air (2011) and The Philippines’ SEAIR (2010). These two new associates have only recently begun operations and there is a perception that both associates will continue to be loss-making as both entities are gradually expanded.

Phillips Capital’s Call
Derrick Heng of Phillips Capital, however, has taken a more centrist approach to the Rights exercise. He believes that the capital raising exercise will help to strengthen Tiger Air’s balance sheet (through the payment of debt) and provide some cash for its plans to grow its network in Asia. However, he points out that,

“if ACCC (Australian Competition and Consumer Commission) does not approve of the divestment of Tiger Airways Australia, (it) would imply higher funding needs for its Australian business.”

This statement comes after Tiger Air recently announced that the ACCC had requested for more information regarding the sale of Tiger Air’s 60 percent stake to Virgin Australia. The ACCC is an agency in Australia that enforces a consumer law that promotes competition among businesses. Because of the nature of the deal, the ACCC could be worried that the deal might ultimately not be in the best interest of Australian consumers.

Derrick’s Call: SELL, with target price of $0.65 (potential downside of 7.1 percent*)

OCBC’s Call
It seems however, that the analysts at OCBC Investments did not get the bearish memo from their counterparts. Siyi and Andy seemed upbeat with the development and felt that the fund raising exercise was expected (although twice the size of its 2011 exercise). They write,

“(The exercise will provide Tiger with)… additional funds in its war chest, its outstanding debt will be reduced by more than one-fifth, and outstanding payments for upcoming aircraft deliveries will be settled.”

Also, they opine that Tiger Air is “still on track to close out the year on a positive note.”

Tiger Air’s latest operating statistics for February 2013 improved across the board over that of 2012. Revenue passenger-kilometre (RPK, a metric used for airline operations) improved 41.6 percent year-on-year. Passenger load factor improved four percentage points to 84 percent, from 80 percent in February 2012.

Siyi and Andy’s Call: BUY, with target price of $0.86 (potential upside of 22.9 percent*)

In a nutshell, the additional funds acquired through the exercise will help Tiger Air purchase aircraft and equipment. It desperately needs this to keep pace with the rest of the pack of budget carriers. However, whether this expansion will go down in history as a wasted attempt cannot be determined. Yet.

So, with this in mind, would you consider buying into Tiger Air on the cheap?

*Based on Tiger Airways’ closing price of $0.70 on 25 March 2013.

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Simeon, an LSE graduate, is currently the editor of Aspire. He specialises on topics surrounding trading psychology, politics and macroeconomics.

Please click here for more information about this author.

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