Highlights/ Comments

• AirAsia is increasing its stake in associate Think Big (BIG) from 46.1% to 71.9% (becoming a subsidiary), by acquiring 25.8% stake from shareholder Tune Money for cash consideration of RM101.5m. The agreed price is based on previous BIG valuation of US$109m, when AIMIA invested US$17.1m for a minority stake in BIG back in Jan 2014.
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• Based on AirAsia latest 9M15 result, AirAsia has a cumulative unrecognized losses amounting to RM31.4m for its 47.8% stake (later diluted to 46.1% by end 2015 after AIMIA increased its stakes). With the acquisition, AirAsia would need to consolidate BIG’s account and recognize the cumulative losses in 1Q16. Given BIG’s track record of losses (since startup in 4Q11), we do not expect BIG’s turnaround within the next 2-3 years, which may drag AirAsia’s earnings performance. BIG reported losses of RM18.2m for 9M15 and RM10.6m in FY14.

• We understand that BIG currently has a membership base of 15.6m across Asia Pacific (vs. 10m back in Jul 2014). BIG aimed for 20m memberships by 2017, leveraging on the regional connectivity of AirAsia group and their partners.

• We are relatively negative on the acquisition, given the high prices offered for a company that is loss making and may exert drag to AirAsia’s earnings in the near term. Nevertheless, we see potential turnaround by 2017-18, when BIG achieves its 20m membership target and able to extract synergies within AirAsia group.

Risks

• World crisis (ie. war, terrorism and epidemic outbreak), delay in KLIA2 completion, prolong surge in jet fuel and high speed train infrastructure between Singapore and P. Pinang.

Forecasts

• Unchanged.

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 subsidy rationalization); and 2) Regional air-demand slowdown and political issues.
• Strengthening of US$.

Valuation

• We remain positive on AirAsia’s outlook given the expectation yield sustainability and lower jet fuel costs. Maintained Buy with unchanged TP of RM2.00 based on unchanged 20% discount to SOP.

Source: Hong Leong Investment Bank Research - 4 Feb 2016