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This article first appeared in The Edge Financial Daily on April 19, 2019

AirAsia Group Bhd
(April 18, RM2.43)
Maintain buy with an unchanged target price (TP) of RM3.40:
AirAsia Group Bhd’s (AAGB) wholly-owned subsidiary AirAsia Investment Ltd together with Gumin Company Ltd and Hai Au Aviation Joint Stock Company have decided to terminate and release each other from all obligations under the transaction agreements of the proposed joint venture (JV) with effect from Wednesday. According to the initial plan, the formerly proposed new low-cost carrier in Vietnam was set to be launched in the third quarter of financial year 2019 (3QFY19).

While the cancellation of the JV may appear to negatively impact AAGB’s expansion plan, we do not think that this is the case. In early April, AAGB introduced Can Tho to its network of routes with a weekly frequency of four flights. In fact, this is the first-ever international flight to Can Tho, indicating AAGB’s lead as an international airline for that destination. Can Tho is AAGB’s sixth destination in Vietnam, while new services between Bangkok and Can Tho are set to be commenced in May. With 8.5 million visitors visiting the Mekong Delta in 2018, we opine that this destination has the potential to attract more visitors which will positively flow into AAGB’s load factor. Therefore, it is not imperative for AAGB to set up a JV carrier in Vietnam.

We maintain our FY19 and FY20 earnings estimates for AAGB as we did not impute any impact from the formerly proposed JV into our estimates. Moreover, AAGB did not make any financial commitments to the JV which would have cost RM58.2 million, representing a 30% stake in Hai Au Aviation Joint Stock Company.

We maintain “buy” with an unchanged TP of RM3.40 per share, pegging its FY19 forecast earnings per share at a price-earnings ratio (PER) of 10 times. It is notable that AAGB is trailing at a PER of 4.1 times, while its Asian peers are approximately trading at a PER above 10 times which we opine is unwarranted given the group’s position as the leading Asean low-cost carrier. Based on our previous analysis of Malaysia Airports Holdings Bhd (buy; TP: RM8.90) in our report on Monday, we opine that the proposed international departure levy will not have much impact on passenger growth. — MIDF Research, April 18

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