AirAsia announced that it has entered into a distributionagreement with Tune Ins Holdings SB (TIH) in relation to the provision ofinsurance products  over the next  10 years. Tune Money together with Tune Inshas also granted to AirAsia a call option agreement  for an irrevocable right to purchase 20%equity interest in TIH during the tenure of the agreement or prior to thelisting of TIH at the option price of one times the Net Asset Value  of TIH subject to a maximum of RM16m. Uponexercise of the share purchase and should TIH fail to be listed during the termof the agreement, AirAsia has the right to exercise a Put Option which requiresTune Money to repurchase the option shares. To recap, this new distributionagreement supersedes its earlier agreement with the provision of servicesextended from 1 to 10 years, with a projected value of RM43m from RM1m in theearlier.

No change in businessoutlook. As the operational agreement remains unchanged, growth outlook forthe insurance segment will continue to grow. AirAsia's revenue from Tune Moneytravel insurance products is in the form of commission from the insurance premium(at a 25% average margin on the premium collected), is also expected to see growth.AirAsia is targeting to collect RM50m worth of commissions over the next few years.With RM100m insurance premiums targeted to be collected in 2011 alone (up 42%y-o-y), AirAsia  raked in at RM20m incommissions last year. Furthermore, like its tie-ups with banks, the marketingcosts are fully  borne by Tune Money.Demand for insurance has picked up notably among passengers who need to makeconnecting flights.

Call option polishesvaluation. The call option exercise allows AirAsia to capture the growingawareness of the travel insurance market which we think AirAsia is likely to exerciseas its network connectivity expands. With a potential listing eventually, this wouldfurther polish the valuation of the insurance stake.

Maintain BUY.  We make no changes to our earnings hence ourFV of RM4.57 pegged at 12x FY12 EPS is maintained. We remain positive on AirAsiaas it is poised to see more yield upside from the withdrawal of Firefly's EastMalaysia routes. Furthermore, earnings from its ongoing JVs are expected tocontribute more this year.

Source: OSK188