AirAsia X (AAX) informed Bursa Malaysia  yesterday that it entered into a Joint Venture Agreement (JVA) with Mr Tassapon (TB) and Mr Julpas Kruesopon  (JK)  on  Wednesday  to  govern  the  relationship  between  the parties  in  Thai  AirAsia  X  (TAAX).  This  marks  a  step  forward  for  AAX towards setting up its new hub in Thailand as guided by management.

- Briefly on the JVA. Under the agreement, AAX will hold 49% while TB  and  JK  will  hold  41%  and  10%  interest  respectively  in  TAAX’s issued and paid up capital of THB400m. TAAX, which is expected to receive the air operator’s licence (AOL) by end-September, will subsequently submit its  application  for  an  air  operator’s certificate  (AOC).  It  will  commence operations  once  it  obtains  approvals  from  the  authorities.  As  we highlighted  in  our  report  initiating  coverage  on  AAX,  we  expect  the carrier  to  commence  operation  by  2QFY14  with  two  aircraft  to  two destinations, i.e. Seoul, South Korea and Tokyo, Japan.

- Expansion  on  track.  This  JVA  marks  a  step  forward  for  AAX  towards expanding to become the leading long-haul low-cost carrier in the region. This expansion is also in line with AAX’s strategy to be the first mover to capture a larger market share to achieve economies of scales. Currently, there is no direct competition for AAX in Bangkok, which is a tourism and travel hot-spot in ASEAN. In addition, Thai AirAsia (TAA) has established a strong brand name in Bangkok for TAAX to leverage on. TAA’s existing 
presence also  lowers  the  regulatory  barriers  to  entry  for  TAAX  vs  other potential new entrants.

- Outlook  remains  bright.  We  remain  positive  on  AAX’s outlook,  which we  think  should  kick-start  smoothly  once  it  obtains  the  necessary approvals  as  TAAX  is  able  to  offer  greater  connectivity  options  to  its passengers from its hubs in Kuala Lumpur and Bangkok. For its first year of operations, we estimate AAX’s start-up losses at MYR12.4m.

- Maintain  BUY,  MYR1.65  FV.  We  make  no  changes  to  our  earnings forecast as this development is within our expectation. We maintain BUY on  AAX,  with  MYR1.65  FV,  derived  from  8.5x  adjusted  FY14F EV/EBITDAR. We see the recent selldown of AAX’s shares as a window of opportunity to accumulate the stock at a lower price. 

Source: RHB