AirAsia Philippines is on, eyes September

AirAsia Bhd
(Dec 17, RM2.66)
Maintain buy at RM2.67 with target price of RM3.36: AirAsia has signed its latest JV agreement to replicate its business in The Philippines as early as September 2011. This news comes as no surprise. We highlighted it in our report dated Dec 9 (AirAsia Philippines: Tony meets Tony). We are upbeat on the long-term prospects of this JV, but are neutral short-term as it will incur start-up losses and require two to three years to turn profitable. Maintain “buy” with a RM3.36 target price based on nine times 2011 price-earnings ratio, a 20% discount to peers.

The 40:60 JV (40% AirAsia, 60% local) is with Antonio Cojuangco, Michael Romero and Marianne Hontiveros. The local partners will assume seats on the board with Cojuangco as chairman and Hontiveros as CEO. Hontiveros, previously from the music industry, is a long-time friend of Datuk Seri Tony Fernandes. She is well-versed in brand-building, and has the “AirAsia DNA” in her already. We have absolute confidence she will play her role well.

]The start-up capital is US$8 million (RM24.4 million), a paltry sum in our view. AirAsia will use its internal funds. By comparison, both the Thai and Indonesian associates had an initial working capital of approximately RM40 million — which turned out to be grossly insufficient. We think a realistic amount is RM100 million to RM150 million.

We think the lessons learnt from the Indonesian and Thai JVs will ensure that this JV achieves quick success. The JV will focus on routes to existing AirAsia hubs to keep costs low and leverage its strong brand prominence. Fernandes is upbeat that the JV will be profitable immediately. It is largely a guessing game for now, but we think the JV will need two to three years to be profitable.

We maintain our forecasts. With the Philippines under its belt, AirAsia’s local catchment is catapulted to 75% of Southeast Asia’s population; no other Asian LCC comes close.

Philippines’ air travel is in its infancy and AirAsia will consolidate that demand with its award-winning service, diverse route network, operational excellence and unrivalled cost. We maintain our forecast as there are no short-term benefits from this JV but concur that the intrinsic value of the group will be higher. — Maybank IB Research, Dec 17