● Capacity growth out of Singapore seems muted in aggregate, supporting the positive yield outlook. Among TR's top five markets, most capacity growth seems reasonable (1-2%), except for Singapore-Malaysia (~9%) where Malindo (OD) is leading the expansion.
● We have raised our EPS estimates for FY16-18, mostly on higher yield and lower fuel cost assumptions. Our EPS forecasts now match/exceed consensus, but we still view the stock as expensive, whether on an absolute or relative basis (adjusted EV/EBITDAR of 8.5x, and adjusted RNAV of ~S$0.10/share).
● Acknowledging the probability of improving sentiment as TR moves into profitability, we raise our TP to S$0.20, using an EVAbased methodology. However, this already assumes levels of excess returns that have proven to be elusive historically.
We have raised our EPS estimates for FY16-18, mostly on higher yield and lower fuel cost assumptions. While TR's 1Q FY16 results released last week still showed a small normalised loss, it was profitable (just barely) at the operating line (~S$1 mn), primarily due to improvements in yield (+6% YoY). CASK dipped 3% too, but gains in fuel (despite hedging losses) were greatly diluted by higher ex-fuel unit costs.
Fleet capacity plans were largely unchanged, with TR still planning to end the financial year with 23 operating aircraft (currently 24). 40% of fuel consumption for July 2015-Sep 2016 is hedged at ~US$87/bbl (suggesting a lower average fuel price than we had previously pencilled in).
Outlook mostly supportive for yield
Airline capacity out of Singapore is almost flat over the 12 months to June 2016. TR's capacity share also looks to be fairly stable, on an aggregate basis. Among its top five markets (~70% of seat capacity), most capacity growth seems reasonable (1-2%), although there could be some pressure in Singapore-Malaysia (+9%), and to a lesser extent, Singapore-Thailand (+5%). The significant capacity expansion in Singapore-Malaysia is being driven by six airlines (including TR) in particular OD (Malindo), which is contributing almost a third of the growth.
Higher expectations, but valuation still highly stretched
Our EPS forecasts now match/exceed consensus, but whichever way we look at it, we fail to conclude that the stock is cheap. A hard-nosed assessment of TR's intrinsic value, based on the balance sheet (adjusted for the market value of owned aircraft) would be below ~S$0.10/share. On an adjusted (with capitalised operating leases) EV/EBITDAR basis, the stock still trades at a premium CY15F 8.5x, vs 6.2x for peers. If we use our usual two-stage EVA methodology and assume ROIC exceeds WACC by 1% over the long term, we still only generate ~S$0.20. TR has managed to achieve this level of excess return only once (in FY11), illustrating the lofty expectations implied by the stock price.
Risk-reward still not attractive; maintain UNDERPERFORM
Unfortunately, we are bound to acknowledge the potential short-term price risk from an improvement in sentiment as TR moves past the inflection point into profitability. We switch to our usual EVA-based methodology (vs book value previously) and raise our TP to S$0.20. But we still see >30% downside and highlight that the bulk of our full year's profit expectations may not come until 3Q FY16 when demand picks up seasonally and the expiration of relatively high-priced fuel hedges kicks in. (Read Report)
Source : Credit Suisse Asia Pacific Equity Research