Tiger Airways - 2Q16 results: Expectations were too high

Excluding one-offs as well as unrealised hedging and forex losses, TR reported a quarterly loss of S$8 mn (2Q15: -S$23 mn). Consensus expected a loss of S$2 mn (CS: +6 mn).

Revenue was up 5% YoY as capacity remained steady but yields and load factor both improved. However, reductions in fuel costs (-21%) were outweighed by a sharp increase in maintenance (+41%) and aircraft operating lease (+55%) expenses.

A portion of the increase in these expenses came from currency movements but the bulk seemed to driven by factors that seemed more permanent. It seems reasonable therefore to expect this higher cost base to remain for the current financial year at least.

We cut earnings estimates for TR ~70-80% but there is still scope for breakeven this year we think. Due to SQ's backing, there may be better support for TR's stock price compared to other airlines. We tweak our TP to S$0.25 accordingly, but keep our UNDERPERFORM rating, as valuations remain stretched (~10x CY15 adj. EV/EBITDAR vs ~6.7x peer mean; TP-implied: ~9x).

2Q FY3/16: Expectations were too high
Excluding one-offs as well as unrealised hedging and forex losses, TR reported a quarterly loss of S$8 mn (2Q15: -S$23 mn). Consensus expected a loss of S$2 mn (CS: +S$6 mn).

What does the result mean?
A portion of the rise in aircraft maintenance and operating lease expenses was due to the strengthening of the USD vs the SGD during the quarter (up +4% on average), but the bulk seemed to be driven by factors that seemed more permanent (though not irreversible). Putting currency fluctuations aside, it seems reasonable therefore to expect TR to operate on this substantially higher cost base for the remainder of this year at least.

We increase our cost assumptions accordingly; after updating our oil and currency inputs for CS's latest forecasts, our earnings estimates for TR are cut by ~70-80%. There is still scope for breakeven this year we think, judging by the way TR's yields have moved in the Oct-Dec quarter in the past. Due to SQ's backing, there may be better support for TR's stock price compared to other airlines. We tweak our TP to S$0.25 accordingly, but keep our UNDERPERFORM rating, as multiples remain stretched (~10x CY15 adjusted EV/EBITDAR, compared to peer mean of ~6.7x; TP-implied: ~9x).

Key numbers and takeaways
Although 2Q16 NPATAMI was negative, it was still 66% better than a year ago. Revenue was up 5% YoY as capacity remained steady but yields and load factor both improved. However, EBIT was still negative as significant reductions in fuel costs (-21%) were outweighed by a sharp increase in maintenance (+41%, even excluding the one-off engineering cost related to planes delivered to IndiGo) and aircraft operating lease (+55%) expenses. Even on a QoQ basis, there was a clear step-up in these costs in 2Q16 (+23% QoQ for maintenance, +26% for aircraft operating leases).

The bulk of the higher maintenance charges seemed to be due to an increase in the average rate per aircraft (rates differ by age), whilst the higher operating lease expense was attributed to the return of 2 A319s into the operating fleet. The first driver seems to be fairly sticky, and there was no indication given that investors should expect either of them to reverse. Due to the way rates change under an agreement, the average maintenance cost per aircraft is also expected to increase further progressively from 2018 onwards, according to management.

Technical Analysis
Daily Chart
No changes to the fleet plan were made; TR still plans to end the year with 23 operating aircraft, after disposing of two owned A320s. (Read Report)

Read Related Reports
1) Tiger Airways - 2QFY16 still unprofitable‏ by OCBC Investment Research, published on 26 October 2015

2) Tiger Airways - Continues On The Recovery Path by RHB Research, published on 26 October 2015

3) Tiger Airways - 2QFY16 Results Note by CIMB Research, published on 23 October 2015

Source : Credit Suisse Asia Pacific Equity Research

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