AST recorded a 22% y-o-y surge in net profit to $5.5m in FY08 on the back of a 22% increase inrevenue. FY08 earnings missed our expectation of $6.5m mainly due to lower-than-expectedincrease in room nights and higher operating costs. Heavy investments to enhance ITinfrastructure continues to drive hefty operating costs, resulting in flattish operating margins of8%.

Despite weakening tourist arrivals in the region during the past 6 months, AST is still able toenjoy a 22% y-o-y increase in online room night bookings. Air ticket sales also recorded anincrease of 30% in 4Q compared to the proceeding quarter. Sustainable improvement in roomnights and its online air ticket sales despite weaker tourism industry affirms the shift in consumerpreference towards on-line, one-stop booking channels.

Going forward, the group will continue to improve upon its IT infrastructure, convenience anduser-friendliness of its websites and portals, expand its hotel destinations footprint, and developnew products to mitigate adverse effects from the softer tourism and travel industry. The grouphas recently teamed up with partners who have notable and high traffic websites to reach newcustomers. At the same time, the group is targeting to enlarge its customer base by includingmulti-languages website to reach markets in Asia in their local languages.

Adversities in the travel industry led by political unrest in one of its key markets – Thailand,terrorist attacks in Mumbai and a global economic downturn will inevitably be a challenge to AST.While we remain optimistic on the potential of its powerful online booking engine, we havelowered our earnings growth expectations for the next 2 years by 30-40% in view of a morechallenging macro-environment. That said, we believe Asia travel will continue to achieve growthin the next 3 years, while is strong balance sheet well-supported by net cash of $7.5m, andpositive operating cash flows of $5-7m a year will enable it to ride out the storm.

We are keeping our Buy recommendation for AST with a revised SOTP target price of $0.55. Thetarget price revision is mainly due to the change in earnings estimates and application of a lowerPER multiple of 8x FY09 PER (13x previously) that is in line with the sector de-rating. The groupis declaring a dividend of 1.1 cents per share, bring its full year DPS for FY08 to 2 cents or a 71%dividend payout. AST’s discounted PER valuations to its sector peers, coupled with its attractivetraits as an M&A target is worth the chance.