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This article first appeared in The Edge Financial Daily on December 11, 2018

AirAsia Group Bhd
(Dec 10, RM3.09)
Maintain buy with an unchanged target price (TP) of RM4.51:
AirAsia Group Bhd announced that it had signed a memorandum of understanding (MoU) reaffirming its intention to set up a low-cost carrier in Vietnam with Vietnam-based regional travel group operator Thien Minh Travel Joint Stock Company (TMG) and sea plane operator Hai Au Aviation Joint Stock Company (HAA), which holds the aircraft operating certificate. The MoU signing ceremony was witnessed by Vietnamese Deputy Prime Minister Vu Duc Dam and Vietnamese Deputy Culture, Sports and Tourism Minister Le Quang Tung.

 

This follows from its earlier shareholder subscription announcement back on March 31, 2017 between AirAsia and the above-mentioned Vietnamese parties through a special purpose vehicle. Based on its previous announcement then, AirAsia would have a 30% stake in the joint-venture (JV) entity (the cap for foreign ownership of a local airline), while the Vietnamese entity will take up a majority combined 69.9% stake with 0.1% to be owned by Tran Trong Kien, who is also the general director/chief executive officer of HAA/TMG respectively. To recap, aside from the share subscription agreement, AirAsia and its local Vietnamese partners will also be providing a loan of US$2 million (RM8.34 million) and US$4 million respectively to the JV.

Based on the announcement on March 31, 2017 (assuming that it remains unchanged), the JV will require a capitalisation of one trillion Vietnamese dong (RM179.3 million), of which AirAsia’s portion will equate to an investment of RM56.8 million, which will be internally raised. We understand that it will initially start operations with two aircraft for domestic routes, which we think could commence sometime in the second half of 2019. However, considering that AirAsia has a sizeable capital cash outlay in its balance sheet following its aircraft divestment, there would be a risk of a more aggressive push in Vietnam.

With a population base of 95 million, Vietnam is the third most populated Asean nation. It is the only missing relevant Asean country where AirAsia has yet to establish a domestic operation. Furthermore, Vietnam has the advantage of a strategic location, whereby airlines can use narrow-body aircraft to fly to all main locations in North Asia, Southeast Asia and India from Hanoi or Ho Chi Minh City. This presents opportunities to grow the international segment with traffic feed into and or from the domestic market.

Vietnam is a growing aviation market, which posted a compound annual growth rate for passengers of 20% from 2012 to 2017. Given the strong incumbents in the market, AirAsia’s entry will certainly further intensify competition, with the domestic market already quite crowded with five carriers. However, we believe this should be rather manageable for AirAsia as it leverages the local strength of its Vietnamese partners. Competition will not be as intense as in Indonesia, in our view, which until today still struggles to maintain earnings consistency. We see Vietnam having the ability to succeed at a much faster pace compared to the Philippines and Indonesia, supported by feeder traffic from its other AirAsia affiliates within the region.

Pending more clarity from management, we have maintained our earnings estimates (financial year 2019 forecast [FY19F]: RM1.19 billion; +5.1% year-on-year). Our sum-of-parts analysis-derived TP of RM4.51 is also unchanged. We have reiterated our “buy” rating. The stock is currently trading at 8.6 times FY19F price-earnings ratio versus global low-cost carrier peers’ average of 13 times. Its share price is also supported by attractive dividend yields, wherein 40 sen was just announced for its third-quarter (3Q) results release (ex-date: Dec 12). We anticipate a shortfall of another 20 sen (versus our full-year forecast of 72 sen) to be announced for 4Q. The spread-out special dividend is likely to minimise the sharp swing upon the ex-date and retain investor interest. — Nomura AEJ Hong Kong, Dec 7

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