Garuda Indonesia (GIAA): Buckle up
Downgrade to HOLD with a slightly lower TP
We downgrade GIAA to HOLD because of strong share-price performance
YTD and lack of positive catalysts. We slightly lower our TP to IDR440
(based on 6.3x EV/EBITDAR) due to lower earnings forecasts. Our
multiple target is 15% higher than regional peers, but we think it is
justified because of GIAA’s higher domestic business which provides
Improving May numbers but might not be enough
GIAA’s May-16 operational numbers suggest, in our view, there are no
significant improvements. Load factor (74.2%) improved 4.9% MoM but
that was, in our view, partly due to seasonality. YoY it was still down
1.5%. Passenger yield remained under pressure at USD6.9c (+2.9% MoM, -
8.2% YoY). The weak load factor and passenger yield suggest continued
competition in the industry. We believe competition for both
international and domestic markets will continue throughout the year
and poses a risk of further dragging down GIAA’s operational numbers in
the following quarters.
Downgrade earnings on lower operational numbers
We downgrade our FY16-17F earnings forecast by -12% and -10%
respectively to reflect tight competition in both domestic and
international markets. We expect net profit for FY16-17F to be USD69m
(-10% YoY) and 97m (+41% YoY) respectively. Note that we have factored
in gains in sales & leaseback of USD22m for FY2016. Our earnings
forecasts are 23% and 11% lower than consensus.
Oil now serves as a downside risk
Oil prices have increased almost 90% to USD49/bbl from its low level of
USD26/bbl. We see downside risk to our 2016 earnings forecasts as GIAA
currently only hedges less than 8% of fuel needs or around 1m barrels.
Ceteris paribus, we estimate every USD1 increase in oil prices would
lower our earnings forecast by 12-13%.