AIRASIA - Back to square one

By AmResearch
15 October 2012

HOLD

Price: RM3.06
Fair Value: RM2.80


It was reported in local dailies this morning that the deal to acquire PT Batavia Air is off. It is said that AA will continue with organic growth in Indonesia and the reason for cancelling the deal was: (1) high cost of restructuring Batavia Air; (2) Management time and resources required to turnaround Batavia.


As a recap, it was announced in late July that AA entered into an agreement with its Indonesia partner PT Fersindo Nusaperkasa to acquire 100% of Batavia Air for a total consideration of US$80mil (c. M248mil). AA would have taken up a 49% stake for US$39mil while Fersindo would have taken up the majority stake. Back then, it was said that the acquisition would have accelerated AA’s growth, particularly in areas such as:

(1) Route network and airport slots at the congested Jakarta airport: Batavia has a ready network of 40 destinations vs. IAA’s (Indonesia Airasia) 8 destinations. Aggressive pricing strategies by competitors with huge capacity share were a big hurdle for IAA to expand organically in the domestic market. Lion Air’s and Garuda’s networks (2 largest domestic players0 both lean heavier towards domestic capacity (70-90% of capacity for domestic flights).

(2) Domestic franchise and market share: IAA is currently weak in the domestic sector: After 8 years in the market, it ranks 6th with only 3.5% market share vs. Batavia Air’s 8% market share and Lion Air’s 42%;

(3) Comprehensive physical ticketing outlets: One of the weaknesses in IAA’s strategy is that it is very reliant on an internet based ticketing system, whereas the Indonesian market is still reliant on ticketing outlets given low internet penetration (c. 20-25%). The acquisition of Batavia Air would have increased AA’s physical distribution channel by 10-fold to >5000 agents.

In a recent teleconference, management highlighted that AA has so far built-up its own physical ticketing outlets to around 2000 agents, from circa 500 outlets in July. The group indicated that it is on track to hit 4000 outlets “soon”.

We maintain our HOLD rating on AA at unchanged fair value of RM2.80/share. We see this development as a slight negative given positive expectations built up into AA’s share price since the deal was announced. More importantly, a potentially yield dilutive environment with the entry of Malindo Air suggests increasing earnings risk within the next 12 months.

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