PT Daewoo Securities Indonesia
We recently visited Garuda Indonesia (GIAA IJ) to get some color on the recent development of the industry/company. Since our inclusion of Garuda Indonesia into our model portfolio (see Garuda Indonesia (GIAA IJ) – Flying Low) on December 7th 2015, price is up 4.6%. Furthermore, we are witnessing increased transaction activity.
The past: All’s well
We met up with GIAA to gain some updates on the recent performance of the company. Based on IATA’s (International Air Transport Association) cargo chartbook in 4Q15, cargo performance has been weak due to soft trading activities across the world. Ocean container suffered the most followed by air freight activities (see Figure 1).
Fortunately for Garuda Indonesia, we see minimum impact as air cargo only contributes 5.6% to the company’s total revenue (see Figure 2). October and November figures were less fortunate months for Garuda Indonesia. In October alone, company cancelled c.1,200 flights in response to Indonesia’s haze disaster, resulting an estimated USD80mn potential loss. In November, Garuda Indonesia halted c.150 flights due to continued haze disaster and c.270 flights caused by Mt. Rinjani eruption in Lombok, generating an approximately USD2.7mn potential loss. The company stated that full year net profit target for 2015 was within USD60-70mn range. As of 11M15, Garuda Indonesia’s run-rate to its full year net profit target was c.82-95% (see Figure 3). Despite unfavorable external challenges, we remain optimistic that the company would be able to achieve its target as 4Q returning Hajj pilgrims and holiday season would offset the negative pullbacks. Over the last four years, GIAA booked solid revenue growth in 4Q, averaging 16% QoQ (see Figure 4).
The future: Flying high
Amid strong headwinds, we foresee 2016 to be a compelling year for Garuda Indonesia. Pertamina, a giant oil distributor in Indonesia, cut the jet fuel price in Soekarno-Hatta airport as much as 5%. Garuda Indonesia would be one of the most beneficiaries as 50% ~ 60% of the company’s aircraft fleets are serviced in Soekarno-Hatta airport. As of 9M15, fuel expenses contributed 29% to company’s total operating expenses (see Figure 5).
We suspect this could provide Garuda Indonesia with c.USD20mn expense cuts in 2016 and boost bottom earnings. On the operating side, Garuda Indonesia is aiming to add 18 more fleet – 9 Airbus for Citilink, its subsidiary in Low Cost Carrier (LCC) and 9 for Garuda Indonesia. The company is ready to bring in 1 Boeing-777, 4 Airbus-330, and 4 ATR72 to expand its fleet. On the hedging strategy, company cited that its hedging duration was reduced from 3-4 months into 1-2 weeks. Furthermore, IATA forecasted steady growth of worldwide passenger in 2016, an increase of 1.5% from 2015 projection (see Figure 6).