Fair Value : RM3.63 | Recom : Trading Buy

Batavia Air deal is off? Batavia Air chief executive director Yudiawan Tansari was quoted by Dow Jones Newswires as saying that an agreement had not been reached with regards to AirAsia’s proposed plan to jointly acquire with its Indonesia AirAsia’s local partner, i.e. PT Fersindo Nusaperkasa, of the entire stake in rival Batavia Air for US$80m (RM240m) cash (AirAsia has yet to make an announcement to Bursa Malaysia in relation to the latest development). Recall, the acquisition would have expanded AirAsia’s domestic market share in Indonesia from 3% to 10% overnight.

But no big deal really. We are not surprised by the latest development as AirAsia already hinted during an analysts’ briefing last month that “having got to know the Indonesia aviation sector better while doing the due diligence for the proposed acquisition”, it ironically increasingly felt that it might be a better idea to grow its Indonesian operations organically (as against via the M&A route). Recall, we were not a big fan of the deal as we were mindful of potential pitfalls such as initial restructuring costs (for instance, from the streamlining of the fleet – Batavia Air’s B737 aircraft are of fuel-guzzling older generation, similar to those MAS is in the midst of phasing out) that meant it may bleed red ink during initial years. Also, we were unsure if Batavia Air’s employees would be receptive to the so-called “AirAsia culture” (think the fallout from the recent MAS-AirAsia share swap) (see our Company Update on AirAsia dated 27 Jul 2012).

Forecasts. Maintained as our forecasts have not reflected the acquisition.

Risks to our view. These include: (1) Lower-than-expected yields achieved; (2) Higher jet fuel cost; and (3) Inability to contain outbreaks of pandemic diseases.

Maintain Trading Buy. AirAsia’s near-monopoly in the domestic low-cost air travel market will be broken with the entrance in May 2013 of Malindo Airways (Malindo). However, we believe AirAsia has many “defences” against it including AirAsia’s true-blue low-cost model (vis-à-vis Malindo’s hybrid or value airline model), stronger balance sheet, bigger size, highly recognised “AirAsia” brand and good safety records. We already see value in AirAsia after the steep selldown on the back of the Malindo news. We believe it will take time for Malindo to grow its operations to a significant size to become a worthy rival to AirAsia. Over the longer term, its survival also depends on its ability to beat or at least match AirAsia’s competitiveness. Fair value for AirAsia is RM3.63 based on 12x FY12/13 EPS, in line with benchmark Ryanair’s 1-year forward target PER.

Source: RHB Research - 12 Oct 2012