The impending IPOs of AirAsia's sister companies AirAsia X, Tune Insurance and associate  Indonesia  AirAsia  will  be  positive  for  the  group  as  this  will  crystallize RM806m into AirAsia's valuations.  Incorporating  the IPOs' pricing  and  the  latestmarket  cap  of its  Thai  associate  Asia  Aviation,  AirAsia  is  trading  at  an  attractive 8.6x PE vs the sector average of 12x. The proposed Batavia acquisition has been called off, which we don't find surprising given that it is debt-laden. We maintain our BUY call on AirAsia, while keeping our RM3.91 FV based on 12x FY13 EPS.  

IPOs again. News reports yesterday said that the Tune Group, held by AirAsia founders and  major  shareholders  Tan  Sri  Tony  Fernandes  and  Datuk  Kamarudin  Meranun,  is looking to raise over RM1bn by listing Tune Insurance, AirAsia X and Indonesia AirAsia sometime  in  1H2013.  Sources  claim  the  insurer  and  AirAsia  X  are  estimated  to  have market caps of RM1bn and RM2bn-RM2.5bn respectively. Indonesia AirAsia expects to see its earnings of RM18.7m contribute to AirAsia's associate earnings, and at 15x PE, its market cap could be at RM572m. AirAsia owns 49% of Indonesia AirAsia.

Buying 20% of Tune Insurance. AirAsia also announced that it will buy a 20% stake in Tune  Insurance  for  RM16m,  which  translates  into  an  attractive  historical  PE  and  PB valuation of 3x and 0.5x respectively. The IPO details are still under wraps, but we think it would not likely involve the exit of its existing shareholders given the growing earnings potential, which will piggyback on AirAsia's aggressive expansion. As such, it is difficult to  ascertain  what  the  potential  dilutive  impact  will  be  for  AirAsia's  20%/17.8%/49%
ownership in Tune Insurance/ AirAsia X/Thai AirAsia.

What  would  the  valuations  be  like?  We  think  that  the  sources'  estimates  on  Tune Insurance  are stretched as the company's 2011  earnings  stood  at  only  RM26.2m (+157% y-o-y) on the back of RM263.5m in revenue (+2.4% y-o-y). Assuming that 2012 earnings could jump 50% y-o-y given its low base, at a 10x PE - which is also the price AIA  Malaysia  is  to  pay  for  the  acquisition  ING  '  its  valuation  is  expected  to  be  near RM393m. At 2x P/B, this is at a slight discount on the 2.2x AIA will pay for ING. AirAsia
X, which reported a FY11 loss of RM122m (FY10's profit was RM132.6m) due to its long haul routes to Europe and India despite seeing its RM1.862bn revenue growing by 44% y-o-y, has a market cap potential of RM2bn-RM2.5bn. Valuations could be in the range of  13.3x-16.6x  PE  and  2.5x-3.5x  (assuming  RM150m  in  forward  earnings),  which  we find rather reasonable. AirAsia X's current debt to equity ratio of 80:20% is much higher than AirAsia's 60:40.

Walking  away  from  Batavia  Air.  We  understand  that  AirAsia  is  expected  to  announce  the cancellation of its proposed USD81m takeover of Batavia Air, Indonesia's second largest low-cost  carrier.  This  is  unsurprising,  the  management  had  hinted  of  it  in  its  conference  call  to analysts and investors last month. AirAsia was eyeing the airline for its massive ticketing agent network and distribution points, given the low internet penetration rate in Indonesia. However, as Batavia Air is an ailing company with USD40m in debt, it makes no sense for AirAsia to take on the additional risk of assuming them, while shouldering the burden of an aging fleet. 

Still  optimistic.  We  remain  optimistic  on  its  outlook  and  think  the  negativity  of  the  Malindo competition  has  been  overblown  as  we  foresee  that  the  impact  would  be  as  what  AirAsia suffered against  last  year  from  Firefly's competition.  Demand  remains buoyant  and  yields  are expected to stage an uptrend over the seasonally stronger 2H.

Maintain  BUY.  Pricing in all the IPOs and taking into account Asia Aviation (AAV)'s latest market  cap  of  RM2.36bn,  AirAsia  is  trading  at  an  attractive  PE  of  8.4x  FY13  earnings  vs  the sector average of 12x.  From the upcoming three listings, AirAsia could realize RM806m from its  stakes.  We  maintain  our  BUY  call,  with  our  FV  unchanged  at  RM3.91,  premised  on  12x FY13 FPS.

 Source: OSK