AIRASIA (FV RM4.57 BUY) Corporate News Flash: Extending agreement with Tune Insurance

THE BUZZ

AirAsia announced that it has entered into a distribution agreement with Tune Ins Holdings SB (TIH) in relation to the provision of insurance products  over the next  10 years. Tune Money together with Tune Ins has also granted to AirAsia a call option agreement  for an irrevocable right to purchase 20% equity interest in TIH during the tenure of the agreement or prior to the listing of TIH at the option price of one times the Net Asset Value  of TIH subject to a maximum of RM16m. Upon exercise of the share purchase and should TIH fail to be listed during the term of the agreement, AirAsia has the right to exercise a Put Option which requires Tune Money to repurchase the option shares. To recap, this new distribution agreement supersedes its earlier agreement with the provision of services extended from 1 to 10 years, with a projected value of RM43m from RM1m in the earlier.

OUR TAKE

No change in business outlook. As the operational agreement remains unchanged, growth outlook for the insurance segment will continue to grow. AirAsia’s revenue from Tune Money travel insurance products is in the form of commission from the insurance premium (at a 25% average margin on the premium collected), is also expected to see growth. AirAsia is targeting to collect RM50m worth of commissions over the next few years. With RM100m insurance premiums targeted to be collected in 2011 alone (up 42% y-o-y), AirAsia  raked in at RM20m in commissions last year. Furthermore, like its tie-ups with banks, the marketing costs are fully  borne by Tune Money. Demand for insurance has picked up notably among passengers who need to make connecting flights.

Call option polishes valuation. The call option exercise allows AirAsia to capture the growing awareness of the travel insurance market which we think AirAsia is likely to exercise as its network connectivity expands. With a potential listing eventually, this would further polish the valuation of the insurance stake.

Maintain BUY.  We make no changes to our earnings hence our FV of RM4.57 pegged at 12x FY12 EPS is maintained. We remain positive on AirAsia as it is poised to see more yield upside from the withdrawal of Firefly’s East Malaysia routes. Furthermore, earnings from its ongoing JVs are expected to contribute more this year.

Source: OSK188