News  AirAsia announced that it has entered into a Conditional Share Sale Agreement together with its partner PT Fersindo Nusaperkasa to acquire PT Metro Batavia for a total consideration of RM254.0m. AirAsia will hold a 49% stake in Metro Batavia (Batavia), Indonesia for  a price consideration of RM124.5m while the remaining 51% majority stake would be held by its Indonesian partner PT Fersindo Nusaperkasa. Batavia is a full service carrier (FSC) airline operating from Jakarta Soekarno-Hatta International Airport, Jakarta.  

Comments  We are neutral on this news as we believe that the acquisition will allow AirAsia to tap into the Indonesian domestic market and collaborate with Indonesia AirAsia (IAA) through IAA's existing international market penetration. 

Assuming a 70:30 debt-to-equity ratio, AirAsia will have to gear up by RM87.1m for the acquisition which will increase its net gearing higher to 1.27x  from 1.26x (based on 1Q12 numbers).  

Batavia is a FSC airline that service 2 main markets i.e. Asia and Middle East. It is currently operating 35 aircrafts with an average fleet age of 12 years. Most of the aircrafts are B737s with 2 A330s.

Batavia holds about a 16% to 18% share of the Indonesia's domestic market and it is a small player for international market. 

AirAsia is likely to revamp Batavia's fleet within the next 3 years after it streamlined Batavia's new routes and business direction or even change its entire business model to low cost carrier (LCC). 

Outlook We do not see any unfavourable competition between Indonesia AirAsia  and Batavia in Indonesia as both are catering to different market segments in Indonesia.   

With the acquisition of Batavia, AirAsia will be able to leverage on Batavia's existing domestic customers to penetrate the local market faster while feeding Batavia with its international passengers via IAA.  

Forecast There are no changes in our forecasts for FY12 and FY13 at this juncture. We do not expect AirAsia to equity account for its 49% stake in Batavia immediately. Based on various news reports, Batavia registered USD6m to USD7m in 2007. There were no further financial details available at this juncture.  

Rating Maintain OUTPERFORM

It offers approximately 10% upside from here. 

Valuation  There is no change in our Target Price of RM4.06, which is based on 13x PER of FY13 earnings.

Risks A spike in fuel price above USD130/barrel.