By OSK Research
12 October 2012
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 latest market 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.
Fair Value: RM3.91
Previous: RM3.91
Price: RM3.04
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