Tiger Airways readies for next big leap with Singapore IPO

Tiger Airways Holdings looks set to become the first company of size to list in Singapore this year as it kicks off the roadshow today for an initial public offering that seeks to raise between S$223.0 million and S$272.5 million ($159 million to $195 million).

Southeast Asia was rather quiet in 2009 in terms of new listings. Singapore saw only one IPO of any significance all year and the top two listings in the region -- mobile operator Maxis in Malaysia and shopping mall builder and operator CapitaMalls Asia in Singapore -- didn't happen until November. But now, companies in the region are clearly showing that they are ready to compete for investor attention in 2010. Aside from Tiger Airways, Thailand's Indorama Ventures is currently on a domestic roadshow to drum up support for an IPO of about $350 million and is expected to start marketing the deal to international investors early next week.

Tiger Airways is raising money to help pay for an aggressive expansion over the coming five years. The low-cost airline, which is currently 49%-owned by Singapore Airlines, has ordered no fewer than 50 new aircraft that will be delivered between 2011 and 2015. This will multiply its current fleet of 17 Airbus A320 aircraft.

Airlines across the world have had a tough time over the past 18 months as the financial crisis has curtailed travelling and exports, but with the economic recovery now under way, things are expected to improve. And Tiger Airways' IPO is well timed as low cost carriers (LCCs) are typically outperforming early in the cycle. The listing is also coinciding with the opening of the two integrated casino resorts in Singapore early this year, which is expected to result in a big boost to tourism.

The company believes there are strong growth opportunities for low-cost airlines such as itself in the Asia-Pacific region, which already account for about one-third of total global air travel; in less than 10 years the low-cost sector is expected to be the largest air travel market in the world. Air travel in the region is forecast to grow at an average annual rate of 6.5% between 2008 and 2028, outperforming the global annual growth rate of 4.9% in the same period.

Arguably, the airline industry in this region is competitive, and LCCs are competing not only with regular carriers, but also (on shorter routes in particular) with other modes of transport such as buses and trains. This is highlighted by the expected announcement today of an alliance between two other budget airlines - Malaysia's AirAsia and Australia's Jetstar. According to earlier media reports, the two carriers are planning to cooperate by various means to help them cut costs.

However, Tiger Airways has shown that its low-cost model, which is similar to that used by successful European budget airline Ryanair, can also be profitable, even when faced with rising fuel prices. Its Singapore-based operations, Tiger Airways Singapore, turned profitable in fiscal 2008, its third year of operation, and sources say the Australian business, which was launched in November 2007, is expected to achieve profitability within the next 12-18 months.

In the fiscal year to March 2008, the company reported a modest net profit of S$9.9 million, followed by a loss of S$50.8 million in fiscal 2009 (which was affected by the launch of Tiger Airways Australia). In the six months to September 2009, it made a loss of S$8.3 million.

Tiger Airways hasn't disclosed the price for the new planes, which are all of the same Airbus A320 type as its existing fleet, but in a preliminary listing document it notes that it believes it has secured the aircraft "on attractive terms" that will allow it to reduce its aircraft ownership costs. However, even if it uses debt financing for the larger portion of these purchases, it is clear that it will be faced with rather large capital expenditure over the next few years and that the fresh equity capital will be needed.

Until now, Tiger Airways has leased its aircraft, but yesterday the company announced that it has secured a financing arrangement with Standard Chartered to pay for two aircraft that will be delivered in January and February this year, and said that these will be the first aircraft that it will own rather than lease. This will enable the airline to further reduce its operating costs and continue to offer its customers across the region the lowest possible air fares, said Tony Davis, Tiger Airways' president and CEO.

"As we continue to grow our fleet, we will look to finance additional aircraft in a similar fashion," he added.

The Standard Chartered financing is backed by export credit agency Coface of France and is structured in Singapore dollars, although the payment for the aircraft will be made in US dollars. Again, there was no mention of the size of the aircraft financing.

Aside from covering the equity portion of the aircraft acquisition costs and pre-delivery payments, the net proceeds from the IPO will also go towards the repayment of all outstanding short-term loans that have been used to finance earlier pre-delivery payments and to potentially establish new hubs in addition to its three current bases in Singapore, Melbourne and Adelaide.

Now in its sixth year of operation, Tiger Airways also intends to increase the frequency of its flights on existing routes and to launch new routes and destinations. On February 1, the airline will start flying to Hong Kong (from Singapore) and on March 28 it will add flights to Brisbane in Australia, both from Melbourne and Adelaide.

The company is selling about 30% of its enlarged share capital in the form of 165.155 million shares, of which 95% are new. The remainder will be sold by Indigo, a US-based private equity firm that specialises in the transportation sector and is one of the four founding shareholders of Tiger Airways. The other three are Singapore Airlines, Temasek through its wholly-owned subsidiary Dhalia, and Ryanasia, which is a company controlled by Ryanair founder Decclan Ryan. Indigo currently owns 24%, so will only be selling a small portion of its stake.

There is also a 12% greenshoe that could add another 19.8 million shares to the deal and increase the total proceeds to as much as $218 million. The shoe will be all existing shares put up by Ryanasia, which currently holds 16% of the company.

The offer price ranges from S$1.35 and S$1.65, which translates into a price-to-earnings ratio of between 11.4 and 13.9 times, based on earnings projections for the fiscal year ending in March 2011.

This puts it a discount to Ryanair, which trades at a 2010 P/E multiple between 14 and 17.5 times, based on various projections. This would make sense, given Ryanair's lower operating history and track record. At the low end of the range it also comes at a discount to AirAsia, which trade at 11.2-12.4 times this year's projected earnings.

Citi and Morgan Stanley are joint bookrunners for the IPO, with DBS acting as a joint lead manager and coordinator for the Singapore retail offering.