Thursday, March 24, 2011

FUND VIEW-Baring Asean fund bets on budget carriers

SINGAPORE: Budget airlines are a good way to tap the growing interest in travel within Southeast Asia, said Baring's regional fund, favouring the Philippines' Cebu Air and Malaysia's AirAsia.

Describing regional low-cost carriers as a secular growth story, Soo-Hai Lim, manager of the $328 million Baring Asean Frontiers Fund, said on Thursday, March 24 he was betting on Cebu and AirAsia to deliver strong growth and earnings, even as soaring oil prices threaten margins.

Low-cost carriers are gaining market share at the expense of full-service airlines and Asia's budget-airline industry has a lot of room to grow given its small size relative to the region's population.

"The stronger story is still with Cebu and AirAsia. AirAsia because it's the leader in this segment; and Cebu because they have a very strong domestic franchise," Lim said.

Lim is less bullish on Singapore's budget carrier Tiger Airways , as its valuations were less attractive than Cebu Air and AirAsia, Asia's largest budget carrier by fleet size.

Tiger Airways was trading at 12.2 times price-to-earnings compared with about 6.5 times for AirAsia for the current year, according to Thomson Reuters data.

The Singapore-based carrier faced greater competition than the other two, which ply domestic routes where they have fewer rivals, he said.

Lim said the situation in Japan remained uncertain but the developments were not necessarily negative for Southeast Asia.

While Thailand's factories would be hurt if production in Japan is disrupted over the medium term, Malaysia and Indonesia would benefit from the country's reCONSTRUCTION [] through higher demand for resources.

The Baring Asean Frontier Fund, which invests mainly in equities listed in Southeast Asia, said it had a return of 37.4 percent last year, compared with the benchmark MSCI South East Asia's 32.2 percent gain.

The fund has returned 40 percent since its inception in August 2008, beating the 35 percent increase in the benchmark.

BULLISH ON COMMODITIES

The fund bought AirAsia shares in 2009, when the stock fell below its IPO price due to the global recession, and has since taken some profit on its investment.

The fund is bullish on Cebu Air, whose shares have plunged 35 percent since it listed in October, as it believes investors have not factored the rise in domestic air travel within the Philippines.

"More Filipinos are flying instead of using ferries because the cost of flying has fallen so much that it becomes more affordable," said Lim.

Cebu Air shares have plunged due to concerns over greater competition in the Philippines and rising oil prices , which have soared to $115 a barrel from about $83 in October.

Asia's low-cost careers are estimated to see an average annual growth of about 19.4 percent from 2008 to 2014, compared with about 4.7 percent for network carriers, according to Morgan Stanley.

Besides airlines, the fund is also bullish on Singapore banks such as United Overseas Bank and Oversea-Chinese Banking Corp due to their cheap valuations and relatively high dividends.

Lim also owns the world's largest oil rig builder Keppel Corp , which is the second-largest holding in its portfolio as of February, as it expects the company to see strong order momentum this year, helped by buoyant oil prices.

His other holdings include Singapore-listed Indonesian palm oil firm Indofood Agri and Vegetable producer China Minzhong as Baring is bullish on commodities. - Reuters

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