Strapped in, and it's no joy flight
Tony Davis is riding the tiger, but it remains to be seen whether or not he will
survive the experience. Davis, 44, is the president and chief executive of Tiger
Airways Holdings, which yesterday formally launched its initial public offering
in Singapore.
Although its been flying passengers and freight around South-East Asia since
September 2004, and Australia since November 2007, Tiger has yet to record a
profit from these activities.
Its prospectus has all the usual blue sky stuff that fledgling airlines tend to
go on about - details about new route and market opportunities, and high passenger
growth rates (56 per cent between fiscal 2006 and fiscal 2009 for Tiger).
One wouldn't expect anything less from a start-up business - although buried in
the fine print of the prospectus is a breakdown between the Asian business and
the Australian one that suggests Tiger's Asian growth went missing in fiscal
2009. Asian revenue rose 1.7 per cent to $S268 million ($208.7 million), while
Australian revenue jumped from $S40 million to $S110 million. In other words,
some 94 per cent of the groups revenue growth was generated by the business in
Australia.
Davis, in a press statement says the IPO is an "important milestone" for Tiger.
It certainly is for him and 52 other directors and staff, who collectively own
28.2 million options that vest and become exercisable (at prices of S8c, S10c,
and S13c) on listing. Davis's share is 7.2 million, although he has another
608,865 that vest in May.
Eschewing a once-planned wider regional institutional market, Tiger and its
underwriters are concentration on a smaller local one whose dedication to all
things boasting a government pedigree should guarantee it a successful offer -
pared down though it might be. Especially with travel to and from Singapore
expected to ramp up in the next few months as the countries two new casinos
(contained within integrated resorts) open.
Genting Berhad kicks off the first of several staged openings of it Resorts
World at Sentosa this month, while Las Veges Sands Corp's Marina Bay Sands opens
the first of its facilities in April.
Where once the talk (unsubstantiated) was of a $S500 million deal, Tiger's
prospectus is for the issue of 155.6 million new shares valued at between $S210
million and $S257 million. Even at peak pricing (and market talk suggests
something closer to the bottom end of the range), only 8 per cent of the funds
will be retained by Tiger for working capital.
Most (67 per cent) will either go to Airbus or to aircraft lessors to fund
aircraft purchases while another 20 per cent goes straight to Tiger's banks to
pay off short-term loans.
Presumably, any reduction from the maximum proceeds will come out of the $S10
million earmarked for "potential new airline and/or operating bases" as well
as the $S20 million for working capital.
Its hard to see Tiger's appetite for capital being anywhere near satiated by
this transaction since prima facie, Tiger doesn't look like its in any shape to
be floated.
Its a young company that is yet to record a profit. Tiger's spin contests this,
and to be fair, it did record a $S9.9 million profit in 2008 - but only because
a tax benefit boosted a break-even pretax result.
Moreover, the prospectus is devoid of profit forecasts, even for the year that
ends in 11 weeks. Much has been made of forecasts made in reports circulated by
the underwriting investment banks (Citigroup, Morgan Stanley and DBS) that
suggest the indicated pricing range represents a multiple of 11.4 to 13.9 times
forecasts 2011 earnings. Those that have seen the reports (I haven't) talk of a
hockey stick trend in earnings.
What the prospectus does include, although are financial statements showing bank
debt of $S111.8 million at September 30, capital expenditure and operating lease
commitments of $S3.8 million and pre-IPO negative shareholders funds of $106.8
million.
Theres also a handy little ready reckoner that points out that if the maximum
IPO price of $S1.65 a share is achieved in the book-build, $S1.38 of it (83.7
per cent) evaporates immediately in the balance sheet - although the negative
S29c-a-share net asset value (NAV) does turn into a positive S27c one (meaning
the company is raising money at six times post issue NAV). A S10c-a-share
reduction in the IPO price results in 84.5 per cent NAV evaporation.
Which bring us to a very curious and unexplained aspect of Tiger's listing -
just why, given that between 43 per cent and 53 per cent of the capital being
raised will be absorbed mopping up the surplus of liabilities over assets, does
the transaction also provide for the sale of existing issued shares?
These are being proffered by Indigo Singapore Partners, a private equity fund
managed by William Franke, and, subject to demand, by the Ryan family's Ryanasia
investment vehicle.
Even if they don't get any stock away now, Indigo and Ryanasia are escrowed for
only six months. Tiger's other founding shareholders, Singapore
government-owned Temasek and it's 54.5 per cent-owned Singapore Airlines, have agreed to a 12 month lock-up on
most of their shares.
Singapore Air's record of sticking with struggling airline investments isn't
great (think Air New Zealand/Ansett, Delta Air Lines, Swissair and Virgin
Atlantic) and concerns on this front aren't helped by the disclosure in Tiger's
prospectus that it competes with Singapore Air (and its subsidiary SilkAir),
and that they "neither co-ordinate our routes nor have any commercial
co-operation agreements". Throw in Singapore Air's dilution from 49 per cent to
34 per cent and the warning bells get a little louder.
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Talk in Asia makes much of the fact that Tiger is the first regional airline to
float since India's Jet Airways listed in 2005 and that others - such as Garuda,
Thai Airways and Lion Air - may also be contemplating use the strong equity
capital markets to fund their own growth. They also still chuckle about the
timing of the Qantas Airways/Jetstar alliance with AirAsia coinciding with the
launch of Tiger's institutional roadshow, and that it focused a lot of minds on
the intensity of the intra- and inter Asian airline industry. Especially the
low-cost carrier one.
Tiger's response was to announce it was bringing forward the delivery of five
Airbus A320 aircraft, two of which are being delivered this month. In a
departure from its previous policy, Tiger plans to won rather than lease these
planes.
Davis says owning the aircraft rather than leasing them (as it has until now)
will allow Tiger to "further reduce" its operating costs. The planes will take
Tiger's fleet to 19 Airbus A320s, although it has 49 more on order for delivery
by December 2015.
Others point out that its fleet is too small (AirAsia, for example has 88
planes, Jetstar has 46 and Virgin Blue 74) and too spread out to maximize
utilization. Perhaps thats why it chopped and changed its Australian flight
schedules.
Tiger makes as much in its prospectus of the lucrative Australian market as of
the growth potential of the Asian one, but half-a-dozen Australian airlines have
crashed and burned in the past 30 years trying to duplicate the profitability of
Qantas by tackling it head on. Only Virgin Blue has survived.
Alan Jury
Chanticleer, Page 48, Australian Financial Review, Thursday 14 January 2010