News

AirAsia announces the termination of its participation in Japan AirAsia Joint Venture (AAJ) with ANA, due to differences in opinions between both shareholders on the management/direction of AAJ.

ANA will buy over AirAsia’s 49% stake in AAJ for RM80.5m. AAJ will return all the A320s aircraft leased from AirAsia by 1st November 2013 and cleared off all the monies accrued from the leasing of the aircraft. The A320s will likely be reassigned to Philippines or India.

AAJ will also settle all outstanding invoices due to AirAsia accrued from the commencement of operations. AAJ will unwind the use of the AirAsia brand in its operations by 1st November 2013.

Following AAJ shares sales agreement completion on 28th June 2013, the Brand License Agreement and other commercial contracts between AirAsia and AAJ will be terminated immediately.

Financial impact

AirAsia has recognized accumulated losses of RM80.5m from AAJ, and written down all its investment cost to zero. We expect AirAsia to write-back the total RM80.5m (one-off gain) from the proceeds of 49% stake sales in AAJ to ANA.

Pros / Cons

We are relatively neutral on the JV termination, as we have not imputed any contribution from AAJ, since we expect the JV to incur losses within the first two years of operation.

The disagreement between shareholders can be detrimental towards the future of AAJ. We praise AirAsia to have made the right but painful decision to terminate the JV, as we would prefer both shareholders to come to a solution.

AirAsia remains confident on the potential of Japan market and looks forward to find another local partner to establish another JV in the country. Nevertheless, every effort is not at a loss (with the termination), as AirAsia has already strengthened its brand name among the Japanese.

Risks

World crisis (ie. war, terrorism and epidemic outbreak), delay in KLIA2 completion, high jet fuel price and development of high speed train between Singapore and Pulau Pinang.

Forecasts

Unchanged.

Rating

HOLD

Positives –

• Beneficiary of strong air traffic into Malaysia, in line with government initiatives to boost tourism sectors.
• Largest and lowest cost LCC in Asia with strong brand name.
• Strong ancillary income.

Negatives –

• High jet fuel cost.
• Entry of Malindo Airways enforcing price competition.
• Proposed construction of high speed railway for KL-SG.

Valuation

Maintained Hold on AirAsia with unchanged TP of RM3.08.

Source:Hong Leong Investment Bank Research- 26 Jun 2013