Stock Name: AIRASIA
Company Name: AIRASIA BHD
AirAsia Bhd
(Aug 10, RM3.54)
Downgrade to sell at RM3.95 with revised target price of RM3.50 (from RM4.60): The press conference announcing the share swap mainly touched on plans for both airlines to collaborate in areas such as aircraft purchasing, maintenance and other support services. Tan Sri Tony Fernandes remains as CEO of AirAsia but has board representation on MAS. Based on prices as at Aug 5, Tune Air's stake in both entities had equal value.
Fernandes indicated that Malaysia has better growth potential than Dubai and also commented on how Singapore Airlines (SIA) is differentiating itself by forming a low-cost carrier (LCC). In June, Virgin Australia ended its code share alliance with MAS and announced a tie-up with SIA. All these support our view that the alliance was in response to competitive factors and for national interest, but one in which AirAsia is relatively immune. It still remains unclear how MAS will address competitive threats. The airline will continue to focus on medium- to long-haul routes and offer premium services. Both airlines have 57 overlapping routes but Fernandes indicated there will be no rationalisation of routes.
While this was touted as an alliance between two airlines, in effect it will impact five airlines within the group ' AirAsia X, AirAsia, Firefly, MASwings and MAS. All these airlines operate fleets as diverse as turboprops (various) to MAS' A380. Firefly had earlier ordered 30 189-seater B738s to challenge AirAsia on regional routes. We are unclear how the management will be able to represent both parties' interests given the clear overlap of routes.
Both MAS and AirAsia will conduct an anti-trust review of operations. MAS is currently not part of any alliance but was said to be open to joining the One-World Alliance prior to the latest tie-up. It is also unclear if the tie-up will have an impact on AirAsia's joint ventures, now that it is aligned to the national carrier.
AirAsia has branded itself an Asian carrier and thus has been successful in forming JVs in other countries. Its image as a hip upstart low-cost airline has won many fans. We believe there could be some risk of brand dilution with the alliance with MAS, which could include partial interlining.
We downgrade the stock to a 'sell' from a 'buy'. While an alliance between AirAsia and MAS could benefit Khazanah Nasional Bhd, we fail to see how it would benefit AirAsia. MAS, like AirAsia, faces structural challenges with the growth of Middle Eastern hubs and airlines. Malaysia's visitor arrivals are primarily leisure travellers on short-haul routes, while Singapore and the Middle East have a greater proportion of mid- to long-haul travellers. We fail to see how an alliance between AirAsia and MAS can change this dynamics.
Our 2011 earnings forecast is unlikely to be impacted by the tie-up. Watch out for potential fallout from its JVs and the planned IPO.
We had previously valued AirAsia at eight times 2012F earned value/earnings before interest, tax, depreciation and amortisation. We now peg fair value at seven times EV/Ebitda and derive a target price of RM3.50. This implies 1.6 times 2011F price-to-book value. Share price catalyst ' none. ' UOBKayHian, Aug 10
This article appeared in The Edge Financial Daily, August 11, 2011.
Company Name: AIRASIA BHD
| Research House: UOB | Price Call: SELL | Target Price: 3.50 |
AirAsia Bhd
(Aug 10, RM3.54)
Downgrade to sell at RM3.95 with revised target price of RM3.50 (from RM4.60): The press conference announcing the share swap mainly touched on plans for both airlines to collaborate in areas such as aircraft purchasing, maintenance and other support services. Tan Sri Tony Fernandes remains as CEO of AirAsia but has board representation on MAS. Based on prices as at Aug 5, Tune Air's stake in both entities had equal value.
Fernandes indicated that Malaysia has better growth potential than Dubai and also commented on how Singapore Airlines (SIA) is differentiating itself by forming a low-cost carrier (LCC). In June, Virgin Australia ended its code share alliance with MAS and announced a tie-up with SIA. All these support our view that the alliance was in response to competitive factors and for national interest, but one in which AirAsia is relatively immune. It still remains unclear how MAS will address competitive threats. The airline will continue to focus on medium- to long-haul routes and offer premium services. Both airlines have 57 overlapping routes but Fernandes indicated there will be no rationalisation of routes.
While this was touted as an alliance between two airlines, in effect it will impact five airlines within the group ' AirAsia X, AirAsia, Firefly, MASwings and MAS. All these airlines operate fleets as diverse as turboprops (various) to MAS' A380. Firefly had earlier ordered 30 189-seater B738s to challenge AirAsia on regional routes. We are unclear how the management will be able to represent both parties' interests given the clear overlap of routes.
Both MAS and AirAsia will conduct an anti-trust review of operations. MAS is currently not part of any alliance but was said to be open to joining the One-World Alliance prior to the latest tie-up. It is also unclear if the tie-up will have an impact on AirAsia's joint ventures, now that it is aligned to the national carrier.
AirAsia has branded itself an Asian carrier and thus has been successful in forming JVs in other countries. Its image as a hip upstart low-cost airline has won many fans. We believe there could be some risk of brand dilution with the alliance with MAS, which could include partial interlining.
We downgrade the stock to a 'sell' from a 'buy'. While an alliance between AirAsia and MAS could benefit Khazanah Nasional Bhd, we fail to see how it would benefit AirAsia. MAS, like AirAsia, faces structural challenges with the growth of Middle Eastern hubs and airlines. Malaysia's visitor arrivals are primarily leisure travellers on short-haul routes, while Singapore and the Middle East have a greater proportion of mid- to long-haul travellers. We fail to see how an alliance between AirAsia and MAS can change this dynamics.
Our 2011 earnings forecast is unlikely to be impacted by the tie-up. Watch out for potential fallout from its JVs and the planned IPO.
We had previously valued AirAsia at eight times 2012F earned value/earnings before interest, tax, depreciation and amortisation. We now peg fair value at seven times EV/Ebitda and derive a target price of RM3.50. This implies 1.6 times 2011F price-to-book value. Share price catalyst ' none. ' UOBKayHian, Aug 10
This article appeared in The Edge Financial Daily, August 11, 2011.
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