Highlights/ Comments

• AirAsia Global Shared Services Sdn Bhd (AGSS), wholly owned subsidiaries of AirAsia Bhd, has entered into a service level agreement with Indonesia AirAsia X (IAAX) and Thailand AirAsia X (TAAX) in relation to provision of services by AGSS.

• Service rendered to IAAX and TAAX are: 1) Finance & Accounting Support Operation Services; 2) People Department Support Operation Services; 3) Information & Technology (IT) Operation Support Services; 4) Sourcing & Procurement Operation Support Services, and; 5) Innovation, Commercial, & Technology (ICT) Services).

• Some of the salient terms (among others) are: 1) services provided are in accordance of the KPI, and; 2) IAAX and TAAX agree to pay staff costs.

• It is pertinent that IAAX and TAAX also subscribe to the agreements to ensure rationalize and standardize the services across the group.

• Further, we understand that the highest percentage ratio applicable to transaction with IAAX and TAAX are 0.05% and 0.06% respectively (Significantly below Bursa maximum allowable percentage at 2.66%).

• Despite the transaction contributing minimal incremental earnings to AirAsia earnings, we are relatively positive on the news as IAAX and TAAX joins the wagon and AirAsia as a group would be able to extract more synergies from their operation as a whole.

Risks

• World crisis (ie. War, terrorism and epidemic outbreak); surge in jet fuel price; US$ appreciation; weak air travel demand; and high speed train infrastructure between Singapore and Pulau Pinang.

Forecasts

• Unchanged for now, pending AirAsia 2Q15 results in 20th August 2015

Rating

• Buy

Positives

• 1) Sustaining lowest cost LCC operator in Asia with largest network and strong brand name; 2) Low jet fuel price; 3) Increasing ancillary income; and 4) Routes rationalization of major competitor MAS.

Negatives

• 1) Higher cost of living faced by consumers (from GST implementation); and 2) Regional air-demand slowdown and political issues.

Valuation

• Maintained BUY and TP of RM3.11 based on unchanged 10% discount to SOP.

Source: Hong Leong Investment Bank Research - 4 Aug 2015