Pretty, Chic and Rich

CIMB PM
Tiger Airways: Stuck between a rock and a hard placeTough operating environment, steep valuations. We believe Tiger Airways could face a tough operating environment going forward. The budget carrier could face headwinds from i) Australian floods, ii) rising oil prices and iii) recovery from reputation loss. In addition, Tiger is trading at 9x CY12 P/E, in line with full service carriers. However, in view of its operational risks going forward, we believe that Tiger should be trading at a lower P/E multiple.Australian floods to impact growth. With almost 50% of its revenues derived from Australia, the existing floods will have near term and longer-term impact on Tiger. Around 30% of Tiger’s Australia route portfolio consists of flights to major airports in Queensland, including Brisbane, Mackay, Gold Coast and Sunshine Coast. Although Tiger will be able to reschedule their route portfolio and transfer capacity to other major airports, the flood will have longer term impacts on Australia’s economy. According to estimates, Australia could need three to five years to reconstruct decimated property and infrastructure in the wake of the floods, and economic growth could be stunted. We expect air travel demand growth to slow and competition between airlines could heighten. Domestic passenger fares could dip and margins could be squeezed going forward.Rising oil prices to add to Tiger’s woes. We expect margins to be squeezed in view of rising oil prices. Although we do note that Tiger engages in fuel hedging practices of 35-40% of total fuel requirement up to 15 months forward, a 1% increase in oil prices will still have a 3.7-4% decrease in EPS, according to our estimates.Steep valuations. At 9x CY12 P/E, Tiger is trading in line with full service carriers. However, in view of operational risks as well as a harsh operating environment going forward, Tiger Airways could see some weak earnings going forward. We believe Tiger should not be trading in line with well capitalized full service carriers, which have lower risk profiles.Recommendation. We have an Underperform recommendation with target price of S$1.59.