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Air Arabia Co.

Source: Shuaa Capital

Air Arabia, based out of Sharjah in the UAE, pioneered the low cost carrier (LCC) model in the Middle East, being the first to introduce it successfully in the region. Its fleet today consists of nine aircrafts, which it flies to 35 destinations around the Middle East and the Indian Sub Continent. The company plans to grow the fleet to over 50 aircrafts by 2016, to be utilized on existing routes and new potential routes in the region.

Core competitive strengths of Air Arabia include its first mover advantage, its ability to quickly scale up, a young fleet, high utilization of its aircrafts, its strong and established brand, its established and effective distribution network, its efficient low cost base and highly favourable home and regional market dynamics.

Core drivers for the company include high expected economic growth, the demographic mix in the UAE and the region, the current low penetration rate of LCCs, the high elasticity of demand, growth in air travel infrastructure and the expected deregulation and liberalization of the sector.

We initiate coverage on Air Arabia with a BUY recommendation based on a fair value estimate of AED 1.49 per share, implying an upside potential of 46% to the IPO plus subscription fees price of AED 1.02 per share. The valuation was based on a weighted average of two valuation techniques, a DCF with a weighting of 70% and a peer valuation with a weighting of 30%.

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