Recently, shares of Garuda Indonesia (GIAA) surged more than 30% following its
public expose (most recent closing price: IDR312). We attribute the price jump to 1)
fundamentals-backed operational improvements, 2) business strategies that
should continue to back up operational results, and 3) the likelihood of joint
operation of GIAA and Air Asia Indonesia (CMPP).
Results have improved since November, encouraging investors
As we expected, some passengers shifted to Garuda Group, as well as SriwijayaGroup, right after the Lion Air crash. Moreover, since the joint operation of GIAA
and Sriwijaya Group, fare increases have been possible for GIAA, Citilink (QG),
Sriwijaya Air (SJ), and NAM Air, given their enlarged market shares. Although
average tariff has gone up, we are witnessing solid passenger growth due to the
shift in passengers in the wake of the incident. We expect prices to rise further, and
we expect the market to digest such increases, given GIAA’s dominant market
share (including Sriwijaya Group).
Investors should also be encouraged by Garuda’s ongoing and upcoming
strategies, such as its move into the cargo business and partnerships with other
firms, which should boost passenger count and load factor. The strategies set to
kick off early this year include, among others, 1) free wi-fi, 2) a new in-flight
experience, and 3) complimentary services for platinum card holders. We believe
GIAA’s management is focused on leveraging current resources and improving
efficiencies rather than pushing beyond its abilities; we think this is reasonable in
the current circumstances.
Joint operation issue too early to be priced in, but positive if realized
The management teams of GIAA and CMPP both recently said they would like toengage in the kind of joint operation that Garuda and Sriwijaya are currently doing.
We believe such a possibility is somewhat priced into recent share movements,
though it seems premature at this point (the two sides have barely begun talks,
and there are no details/studies). However, if such joint operation materializes, it
should benefit GIAA in terms yield (or price), allowing it to strengthen priceadjusting power domestically as well as internationally. For reference, GIAA and
CMPP control more than 50% of the Indonesian outbound travel market. Air Asia
Indonesia’s share price also surged 24.5% on January 3rd, which could be partly
due to the joint operation issue, but likely has more to do with its conditional
perpetual capital security purchase agreement, which could help it pay down debt.
Maintain Trading Buy recommendation and raise TP
We maintain our Trading Buy recommendation on GIAA and raise our target priceto IDR352, reflecting higher average prices, the growing number of passengers,
larger non-core revenues, and the recent fall in fuel prices. Our target price implies
a target P/B of 0.7x our 12-month rolling forward BPS estimate. The key risks to our
call are 1) increasing fuel prices, 2) tightening competition, and 3) natural disasterrelated safety concerns.
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