Air Arabia

Executive Summary

This report is an initiation of coverage on Air Arabia P.J.S.C. & Subsidiary (AIR ARABIA) listed on the Dubai Financial Market since 2007. We focused on the company’s operations, activities and financial performance over a historical period (4 years back), along with relevant macroeconomic variables in order to accurately forecast the company’s financials and reach a long term fair value for the stock.

Air Arabia is a low-cost airline based in Sharjah in the United Arab Emirates. The company operates scheduled services to 46 destinations in the Middle East, North Africa, the Indian subcontinent, Central Asia and Europe. Its main base is Sharjah International Airport.

Our estimated target price of Air Arabia stock is based on hybrid valuation methods as stipulated hereinafter in the report. Our conclusion is driven by the Discounted Cash Flow approach (Free Cash Flow to the Firm) as well as Relative Valuation techniques (Price to Earnings and Price to Book Value). Given the current market conditions (very low, not to say expected negative earnings for certain companies), we favored a discounted cash flow approach, assigning 80% weight to the DCF-FCFF, 10% weight to Price to Earnings and 10% weight to Price to Book Value models to reach a fair value of AED1.29 per share.

As of June 16, 2009, Air Arabia was trading at AED1.04, standing at a 24% discount to our estimated fair value. We therefore rate the stock as “Undervalued”.