Garuda Indonesia (Not Rated) Dissipating discount factor

Selasa, 28 April 2015

Dissipating discount factor

We recently visit Garuda Indonesia (GIAA) to get a better sense of the rumors (regarding GIAA’s earnings recovery) in the market. For the first three months of the year, GIAA is expected to recover from its laggard performance which was exhibited throughout 2014. Management stated that it implemented three new strategies: 1) Flight network restructuring, 2) Cost efficiency and 3) Refinancing loan strategy. According to the company’s latest presentation document, for the first two months of the year, the company booked a positive EBITDAR of USD147.1mn from –USD20.3mn with a total Operating Expense of USD269.7mn improved from USD293.9mn last year making the bottom line came in at –USD2.8mn compared to –USD73.7mn last year. We believe GIAA will have an outstanding performance in 1Q15 and be able to maintain the good performance over the long term as the macro has turned favorable to the company

Company in brief

Founded in 1949, Garuda is one of the major airlines in Indonesia that provides both domestic and international flights (passengers and cargo) with a total market share of c. 30% in the aviation business along with its subsidiary, Citilink. It is the only Indonesian airline that was recognized as a five-star airline by Skytrax (UK-based consultancy on airline and airport review and ranking site) and provided international flights to Eurozone while most other Indonesian airlines are still banned due to safety concerns especially since the tragedy of Lion Air and Air Asia which has made people prioritized safety over price.

Dissipating discount factor

One of the key changes that has made the company optimist on giving a better performance in 2015 is flight network restructuring. They reduce several unprofitable flight routes in Japan and Australia as those routes are still in investment stage where the total cost is not fully covered yet. Instead, the company focuses on developing routes in China on top of Beijing, Shanghai and Guangzhou such as Chengdu, Chong Qin, Ningbo, Kunming, Jinan, Harbin, Xian, Shenyang and Chengzhou from and to Denpasar as well as Manado. Moreover, Garuda will also focus on developing market to the Middle East especially in the growing of Umrah market. In addition, the other important strategy that the management took on the early 2015 is cost efficiency program. The restructuring of cost driver has enabled the company to achieve a substantial amount of efficiency with a potential saving of USD172.3mn from lower fuel price which contributed c.40% of total costs and another potential saving of USD146.9mn from other efficiency initiatives such as ticketing, general & administrative, etc. From the operational side, January ASK (Available Seat Kilometers) for domestic increased 13.3% YoY while the international route picked up 6.5%. What is notable is that RPK (Revenue Pax Kilometres) improved 21% for domestic and 21.6% for international. As a result, we could see 7.1% improvement on the seat load factor. As Feb figures also showed similar performance trends, we believe 1Q15 result should likely mark a rebound, ending the long discount factor on the carrier.

Labels: Stock Analysis

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