MIDF Sector Research

Author: sectoranalyst   |   Latest post: Fri, 24 May 2019, 10:57 AM


AirAsia Group Berhad - JV to Form LCC in Vietnam Called Off

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  • JV to form low cost carrier in Vietnam called off
  • On a positive note AAGB introduced its first flight from KL to Can Tho in early April 2019, the first international flight to the destination
  • AAGB did not make any financial commitments to the formerly proposed joint venture in Vietnam
  • Earnings estimates left unchanged
  • Maintain BUY with unchanged target price of RM3.40 per share

JV to form LCC in Vietnam called off. AAGB’s wholly-owned subsidiary, AirAsia Investment Limited together with Gumin Company Limited and Hai Au Aviation Joint Stock Company have decided to terminate and release each other from all other obligations under the transaction agreements of the proposed joint venture with effect from 17 April 2019. According to the initial plan, the formerly proposed new low cost carrier in Vietnam was set to launch in 3QFY19.

Our View. While the cancellation of the joint venture may appear to negatively impact AAGB’s expansion plan, we do not think that this is the case. In early April 2019, AAGB introduced Can Tho to its network of routes with a weekly frequency of four flights. In fact, this is the first ever international flight to Can Tho, indicating AAGB’s lead as an international airline for that destination. Can Tho is AAGB’s sixth destination in Vietnam while new services between Bangkok and Can Tho are set to commence in May 2019. With 8.5m visitors visiting the Mekong Delta in 2018, we opine that this destination has the potential to attract more visitors which will positively flow to AAGB’s load factor. Therefore, it is not imperative for AAGB to set up a JV carrier in Vietnam.

Impact on earnings. We are maintaining our FY19 and FY20 earnings estimates AAGB as we did not impute any impact from the formerly proposed joint venture into our estimates. Moreover, AAGB did not make any financial commitments to the joint venture which would have cost RM58.2m, representing a 30% stake in the Hai Au Aviation Joint Stock Company.

Maintain BUY with an unchanged TP of RM3.40 per share, pegging its FY19 EPS to PER of 10x. It is notable that AAGB is trailing at a PER of 4.1x, while its Asian peers are approximately trading at a PER above 10x which we opine is unwarranted given the group’s position as the leading ASEAN low cost carrier. Based on our previous analysis for MAHB (BUY; TP:RM8.90) in our report dated 15 April 2019, we opine that the proposed international departure levy will not have much impact on the passenger growth.

Source: MIDF Research - 18 Apr 2019

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