Journey to Wealth
AirAsia - Buys Indonesia's 2nd Largest Low Cost Carrier
AirAsia, together with its Indonesian partner, announced its first airline acquisition yesterday by proposing to take over Batavia Air for USD81m. The acquisition of Batavia Air, which ranks 3rd in market share in the archipelago, will see AirAsia's combined share in the Indonesian market surge up from the current 2% to 14%. This will positively benefit AirAsia's overall traffic network and gives it access to a strong sales distribution and agency network, which is crucial in expanding in the domestic Indonesian market. We maintain our earnings forecast pending more clarity from Management. We remain bullish on AirAsia's growth story. Maintain BUY and FV of RM4.57.
A fair acquisition. AirAsia, together with its Indonesian partner which holds 51% stake in Indonesia AirAsia, announced its first airline acquisition yesterday by proposing to take over Batavia Air. The 49% stake acquisition by AirAsia for a total sum of USD81m, to be financed by internally generated funds, will see Batavia Air as its new Indonesian sister company (at the associate level). The acquisition is valued at 16x historical PE, which is deemed fair and in line with the average global low cost carrier valuation. With a potential for stronger earnings once it is professionally managed, we see the acquisition to be a good fit for AirAsia and boosts its ability to tap into Indonesia's growing travel demand. Note that the net effect on AirAsia's total net gearing would not be much ' we only expect its net gearing to nudge up slightly from 1.33x to 1.35x.
Expanding market share. Batavia Air is Indonesia's second largest low cost carrier and ranks third in market share behind Lion Air and Garuda. The acquisition will immediately see AirAsia's combined Indonesian market share shoot up from the current 2% to 14%, which will greatly bolster the group's overall traffic network. It will also significantly strengthen the group's sales distribution and agency network, which is crucial in Indonesia given the nation's low internet penetration coverage.
Emphasizing in cost cutting. Although profitable, the family-operated Batavia Air is operationally not well managed, registering net margins of only 0.8% last year. With AirAsia professionally running the show, we see a lot of room for potential cost cuts in line with the AirAsia culture.
Maintain BUY. AirAsia's acquisition of Batavia Air heralds another leg of growth moving forward. Pending more earnings guidance and clarity from management, we maintain our earnings projections for AirAsia for now. At the current price, AirAsia is trading at 10x FY12 PE vs its peers' range of 12x-15x. We value AirAsia at 12x FY12 EPS, at an unchanged FV of RM4.57. The carrier remains as our top pick in our regional aviation coverage. Maintain BUY.
The acquisition deal. Malaysia AirAsia (AirAsia) yesterday announced that it has entered into a Conditional Share Sale Agreement together with its partner PT Fersindo Nusaperkasa to acquire PT Metro Batavia, which operates the Indonesian airline, Batavia Air, and Aero Flyer Institute, an aviation training school. This marks AirAsia's first airline acquisition. In accordance with Indonesian civil aviation ownership regulations, AirAsia will hold a 49% stake in Metro Batavia Group, with the 51% majority held by its Indonesian partner, Fersindo. Fersindo is also the 51% majority shareholder of PT Indonesia AirAsia. The total purchasing consideration of USD81m (RM254m) and will be settled in cash and will be carried out in two stages, through acquisition of a majority 76.95% stake and subsequently followed by the remaining 23.05% held by its existing shareholders. Correspondingly, the total purchasing consideration for 100% interest in AFI is USD1m (RM3m). AirAsia's portion of 49% stake in the airline and 100% stake in the aviation school will cost is USD39.2m and USD1m, respectively. The acquisition, to be internally funded, is expected to complete by 2QFY13, and is subject to regulatory approvals in Indonesia. Batavia Air has a sizeable market size. According to 2011 data, Indonesia has a total domestic passenger size of 66.44m (15% y-o-y), making it the world's 12th largest domestic aviation market (Malaysia handled only 33.1m pax). However, the Indon market is deemed fragmented and very competitive with eight major players. With a total fleet size of 37 aircraft, Batavia Air handled approximately 7.9m domestic passengers to represent a total market share of 11.9%, ranking third behind Lion Air (at 24.97m pax), Garuda (at 13.9m pax). Sriwijaya is its comparable competitor by passenger size, handling approximately 7.38m pax, followed by Merpati Air (6m pax). AirAsia Indonesia handled approximately 1.31m passengers in 2011. AirAsia's acquisition of Batavia Air will see its domestic market share immediately enlarged from the current 2% to a total market share of 14%.
Outlook of Indonesia aviation bullish. Indonesia's 230m population presents a promising prospect for air travel, which could double by 2020 given the rising welfare and its low air travel penetration rate. To top it up, low cost passenger penetration is still comparably low at less than 10% (see Figure 4). This can be witnessed in Indonesia AirAsia's passenger growth for the 2H, which grew by 15.6% y-o-y. This has initiated the Ministry of Transport to target to build 14 new airports by 2030. With open skies policy in the ASEAN aviation market kicking in by 2015, this has also prompted the government to possibly make at least 12 of the country's 21 international airports available under the open skies agreement by upgrading its airport infrastructures. Currently only the airports in Jakarta, Denpasar, Medan, Surabaya and Makassar have met the infrastructure requirements.
Fast track in expanding market share and leveraging on a strong distribution network. AirAsia's acquisition of Batavia Air will see AirAsia's domestic market share ballooned immediately from the current 2% to a total market share of 14%.The acquisition fast tracks the group's domestic market share penetration and undercuts the risk of failing through slow organic growth given the intensifying competition with the bigger local players. AirAsia has had difficulty to increase its domestic market share over the past few years given the stiff competition and lack of a strong physical sales distribution network. Batavia Air has a compatible domestic Distribution Channel comprising 43 outlets with about 4666 agents and with the acquisition, AirAsia's distribution channels in Indonesia will increase ten-fold to over 5000 authorized agents and more than 70 sales outlets. This enlarged agency footprint will AirAsia be able to reach even more customers, complementing its internet-based sales.
Batavia Air's domestic route network to act as traffic feed. Batavia Air currently serves 40 destinations across its domestic network vs AirAsia's eight. The acquisition brings in a sizeable feeder network across other sister airlines of AirAsia and serves as new outbound gateways. Combined, AirAsia, Indonesia AirAsia and Batavia will serve a total 42 domestic and 12 international destinations. Interestingly, Batavia Air also serves international long haul flight connectivity as far as Jeddah and China and is expected to seal the Haneda (Japan) route as well. Such move could also facilitate a new hub other than operating solely from its existing Kuala Lumpur hub. This bodes well in providing more traffic feed for the Group's network.
leet profile. Batavia Air has a total of 37 aircraft, of which 17 are owned and the rest leased. The estimated average age of 15-20 years is a concern, however, and explains its low net profit margin of less than 1% given the high fuel burn rate and maintenance costs. With AirAsia's sizeable order from Airbus, we see some of these new planes to be injected to Batavia Air hence reducing average age going forward and its overall profitability margins. For instance, Indonesia AirAsia in Q42012 saw its EBIT margin improving tremendously from 3% to 8% as maintenance costs halved after disposing off its aging B737s.
Access to maintenance and personnel training operations. The acquisition of USD81m acquisition of Batavia Air is packaged with a 100% ownership of Aero Flyer Institute for USD1m offered to AirAsia. Aero Flyer Institute is Indonesia's leading flight training schools and one of the most trusted names in aviation training. Its simulators are the older versions of the Boeing 737s (Full-motion Level "C" Boeing 737-200 / 300 / 400 simulator) although they still remain relevant and essential in any flight training academies. With AirAsia already establishing a tie up with CAE in Malaysia, this presents an opportunity for AirAsia to monetize the business into Indonesia's growing aviation market.
Brief history on Batavia Air. Yudiawan Tansari (60 years old), the owner of Batavia Air, has keen on selling the family-run business as far back as 2006. Since its inception in 2002, the airline has managed to expand domestically and grown significantly. Mr Tansari's first business endeavour, PT Setia Sarana Tour & Travel in 1973 and entered the airline industry following two decades worth of experience in travel services. As it is a family business, his children, who sit on the company's board, are involved in running the business.
Financials of Batavia Air not too exciting for now. Batavia Air expects its revenue to grow by 15% in 2012 to IDR5.63tn (USD619m/RM1.963bn). Earnings for last year are understood to be at (USD5m/RM15.8m), giving a thin profit margin of only 0.8%, despite load factor averaging at an estimated 80%. The thin profit margin is understandable given that it is family run business and could thus be poorly managed. Furthermore, to add on its high cost structure base, its fleet's age is on the high side and it has an extensive sales distribution point and agency network where there could be overlaps in coverage. In its balance sheet, Batavia is sitting on USD40m in debts and it was rumored that it had two of its leased aircrafts repossessed back a couple of months as it was unable to meet its lease payment obligations, signaling more financial distress in the company.
AirAsia to emphasize in cutting high cost structure. With Mr. Tansari completely disposing of his ownership and the exiting of his family in running the business, Batavia Air will be more professionally managed on a merit base system which fits with the AirAsia culture, emphasizing on running its airline operations frugally. Costs improvements opportunities are aplenty for Batavia Air moving forward after being integrated operationally with AirAsia across all chains, such as sales distribution points (by cutting commissions to agencies) to passenger take offs and handling.
Analysis of revenue per passenger. Indonesia's AirAsia average unit passenger revenue (incorporating ancillary revenue) averaged at IDR739k last year which is 9% above Batavia's average unit earned of IDR677k. The higher average revenue earned was due to AirAsia's higher exposure to international destinations, but even such, Batavia's average revenue per pax is considered on the high side as we note that Lion Air averaged much lower at an estimated range of IDR400k/pax in its efforts to aggressively increasing market share. With AirAsia coming in, we foresee more discounts to expand its market share further. Operationally, this could be feasible as AirAsia will be able to operate at a lower cost structure.
Valuations deemed fair. At last year's profit of USD5m, the acquisition of USD80m is valued at 16x historical PE which is deemed fair in line with the average global low cost carrier valuation. With a potential turnaround in earnings once it is professionally managed, we see the acquisition to be a good fit for AirAsia to tap into Indonesia's growing travel demand. The net effect on total net gearing would not be much we only expect its net gearing to nudge up slightly from 1.33x to 1.35x. As of 1QFY12, AirAsia's net gearing stood at 1.26x, but with upcoming aircraft deliveries this would progressively be higher. Note that since AirAsia will ultimately own 49% in Batavia Air, this will be deemed as an associate company.
A bigger Indonesia IPO in the making? With AirAsia now owning 2 Indonesian sister companies, we foresee that funds raised from Indonesia AirAsia's upcoming IPO could be utilized to acquire Batavia Air as both sister companies merges into a single entity. This would make its upcoming IPO more interesting given the larger market share capture.
Maintain BUY. Following the announcements of expansion plans in the Philippines and Japan, AirAsia's acquisition of Batavia Air cements another leg for growth moving forward, which explains Tan Sri Datuk Tony Fernandes' recent relocation to Indonesia and Aireen Omar's appointment as AirAsia Bhd's CEO. Pending more earnings guidance and clarity from management, we maintain our earnings projections for AirAsia for now, as we believe its earnings will remain intact. At the current price, AirAsia is trading at 10x FY12 PE vs its peers' range of 12x-15x and even lower than its Thai associate's recent listing at 12x FY12PE. We value the airline at 12x FY12 EPS, with an unchanged FV of RM4.57. AirAsia remains as our top pick in our regional aviation coverage. Maintain BUY.
Source: OSK
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