Equity Research

PT PT Garuda
Garuda Indonesia
Indonesia
9
GIAA
GIAA
Investment Highlight
Financial Summary
2014 2015 2016 2017

RoA (%) (11.85) 2.36 0.25 (5.67) Oil Price are Declining in Early 2019
RoE (%) (41.95) 8.20 0.93 22.76

Current Ratio (%) 66.47 84.28 74.52 51.34

Oil prices are currently falling because of increased supply in the US which
will result in reduced operating expense. GIAA can buy stock for future
DER (x) 1.33 1.43 1.68 1.83
reserves so that it can maintain operating expense so that it does not
DAR (x) 0.38 0.41 0.45 0.46
exceed operating revenue because based on the analysis it turns out that
Operating Margin (10.05) 4.42 2.56 (1.82)
the losses experienced by the GIAA were caused by oil prices.
Net Margin (9.38) 2.04 0.24 (5.10)

EBITDAR 13.98 32.77 33.12 27.07 Revocation of Citilink baggage rates

Use of baggage rates carried out by several LCC airlines. Previously, GIAA
Ownership applied baggage rates for domestic flights for Citilink airlines. But because
Shareholders (%)
PT Trans Airways 25.6
of the many protests that took place, Citilink revoked the tariff and will
Government of RI 60.5 monitor developments on other airlines that still apply the tariff. GIAA will
Public 13.9 monitor positive or negative impacts on sales.

GIAA Is The Market Leader in Indonesia

Stock Price (last 3 years) GIAA is the market leader of local airlines on international flights and is the
second market leader of local airlines on domestic flights. As an analysis of
the top 7 airlines in Europe and the US, which controls the market, it is
getting better and worse.

Key Risk : New Management = New Initiative

New management that is trusted will have a positive impact on the GIAA
company. September 12th, 2018 Garuda's new crew, led by Mr. Ari Askhara
is focusing on "Quick Wins" enhancement and profitability strategy with
revenue improvement as main focus. New management can also be a
negative impact on the company because it has not been tested.
Source : Company & Wall Street
 Macroeconomic
In Indonesia
Indonesia Microeconomic Indicators
01 2011 2012 2013 2014 2015 2016 2017 2018
Gross Domestic Product 6.2 6.0 5.6 5.0 4.8 5.0 5.1 5.2
(annual % change)
GDP growth in Indonesia
is not constant but stable Inflation/CPI 5.4 4.3 8.4 8.4 3.4 3.0 3.6 3.0
(annual % change)
as the population
increases. Exchange Rate 8,773 9,419 11,563 11,800 13,389 13,309 13,381 14,250
(USD/IDR)

Population 245 248 251 254 258 261 264 267

02 (in millions)

Source : Indonesia-investment.com
The condition of crude oil commodities

The increase in oil prices

since 2016 but is
experiencing a decline
into 2019.

The increase in oil prices

since 2016 but is
experiencing a decline
into 2019.

Source : Seputarforex.com

Economic conditions in Indonesia are still relatively safe and are predicted to continue to grow in all industrial
sectors. Bank Mandiri Chief Economist Anton H Gunawan said, with various global challenges and estimates of
future conditions, it predicts Indonesia's economic growth in 2019 by 5.1 percent. Through macro assumptions in
the 2019 RAPBN, the government targets next year's economic growth of 5.4 percent.
 Flight
Industry
Domestic Flight Data
01 Arrivals of Domestic Flight

Overall, the number of

arrivals and departures for
passengers, baggage, and
cargo, both domestic and
international, increased
from 2013 to 2017. While
overall mail and packages
decreased from 2013 to
2017 and an increase in Source : BPS

the number of
international arrivals.

02
The market share of the
aviation industry in
Indonesia is still
dominated by GIAA.
Source : BPS

03 Lion Air
DOMESTIC MARKET SHARE
2017
Garuda Indonesia Citilink Batik Air
2017
Sriwijaya Air Wings Abadi NAM Air Others

3% 4%
Airline consolidation 6%

34%
10%

industry - a global 10%

wave. 13%
20%

Source : Company

Airline consolidation industry - a global wave

The global wave of airline industry consolidation has started in the west since the last decade in the US before
sweeping the European market. For the European market, the consolidation of the airline industry has started
triggered by the bankruptcy of three major European carriers; Air Berlin, Alitalia and Monarch airlines within the
past 24 months. This was also followed by a number of bankruptcies involving SkyWork, VLM Cobalt Air, Small
Planet Airlines Germany and Primera Air. Even though the current European airline market is not clear, it is quite
clear that the future of the European airline industry will involve a lot of inevitable consolidations. Ever since
consolidation has begun in Europe, the top seven carrier share has grown to 55.5% in 2018; please note that this is
still significantly lower than that of North America at 81.8%. So the European airline company far has enjoyed an
improved margin although capped around ~ 6.8% net margin as a result of increasing fuel prices, the presence of
low cost carriers (LCC) such as Ryan Air and Easyjet, and significant competition from owned airlines from Gulf-
states including Qatar Airways, Eithad Airways and Emirates Airlines.The North American airline industry has been
known to be a market
with major consolidation, where the players are slowly acquiring the smaller industries. Post the acquisition of
TWA by American Airlines in 2001 there has been 16 M & As in the US airline industry, with Alaskan Airlines
acquiring Virgin America in 2016 as notable acquisition happened lately. The number of major North American
carriers used to be 38 in 1980, and now only left with 9. The top 7 carrier in North America; American Airlines,
Delta, Southwest, United, Air Canada, Alaska Airline and Jetblue hold 81.8% share of the market (according to
CAPA). This is significantly higher than Europe's 55.5% top 7 seat shares. Furthermore, with a concentrated
market, the average profit margin for the carriers in North America is 11.1% vs. 6.8% in Europe. To put things in
perspective Indonesia is a more concentrated event than the US market, where the top 3 carriers accounts for>
90% of the market share; which has been a global norm; a positive for GIAA for an untapped fare improvement
potential that the company can give its significant bargaining power.
 Company
Established in 1949 (taken by the govt in 1954), Garuda Indonesia (GIAA) has become an

01 internationally recognized airline company in the world. GIAA had its IPO back in 2011 and
joined the SkyTeam global alliances back in 2014 winning multiple awards. Its market
share is ~39% in the domestic market (2nd after Lion Air) and ~24% in the international
market pie as of Nov’18. The company has been facing fierce price war in the market ever
Company background
since fuel price dropped. In spite of this, GIAA has been able to book strong passenger
from 1949 until present.
carried growth in the domestic airline market over the past 5 years (9% CAGR 201318).
GIAA has 7 subsidiaries as its supporting businesses such as hotels, travel agents/tourism-
related, ground handling and maintenance services. Garuda Indonesia (GIAA) main source
02 of revenue are passenger revenue (contributes 74% of total revenue in 9M18) other
scheduled airline services as well as non-scheduled airline services. The passenger
revenue consists of full service carrier (FSC) domestic flight, international flights and low-
cost carrier (LCC under the brand Citilink). Its full service carrier charges 80%-100% of the
ceiling price set by the government whereas the LCCs charge at a minimum of 30% (soon
to be 35%) of ceiling ticket price. GIAA’s only competition in the FSC is Lion Group’s Batik
Air. Given GIAA’s wellrecognized quality, on-time performance, we do not see much
03 competition in the FSC segment even after the emergence of Batik Air. On the other hand,
its LCC faces tough competition against other LCCs such as Lion Air and AirAsia. The FSC
focus is service excellence. Whereas the LCC segment being a thin margin business with
GIAA’s fleet structure. short-hauls, focuses on the importance of fleet allocations and heavily relies on cross-
GIAA’s domestic selling strategies (eg; excess baggage and food caterings revenue).
presence.
 GIAA'S PASSENGERS CONTRIBUTION
04 Domestic FSC International Citilink

21% 26% 28% 32% 34%

Garuda’s passanger
15%
growth has been driven by 14% 13%
13% 13%
both its domestic FSC and
LCC (Citilink) business;
with its LCC business 63% 60% 59% 56% 53%
outpacing its counterparts
in terms growth coming at
18% CAGR on 2013-17 2013 2014 2015 2016 2017

(vs 4% CAGR for Source : Company

Revenue breakdown Revenue breakdown
Garuda’s domestic FSC in by service-type by carrier-type
the same period).

05
Revenue and opex
contribution Flight operation opex
Opex breakdown breakdown

05
The subsidiaries revenues
US$821.2 million,
contributed 25.5% of total
group

GIAA’s subsidiaries

Source : Company
 New Management, New Focus, New
Environment
Previous management: Current management:

01
1. Direktur Utama : Pahala N. Mansury 1. Direktur Utama : I Gusti Ngurah Askhara Danadiputra
2. Direktur Niaga Domestik : Nina Sulistyowati 2. Direktur Niaga : Pikri Ilham Kurniansyah
3. Direktur Niaga Internasional & Kargo : Sigit Muhartono 3. Direktur Kargo & Pengembangan Usaha : Muh. Iqbal
4. Direktur Keuangan : Helmy Satriyono 4. Direktur Keuangan: Fuad Rizal
5. Direktur SDM & Umum : Linggarsari Suharso 5. Direktur Human Capital : Heri Akhyar
September 12th, 2018 6. Direktur Operasi : Capt. Triyanto Moeharsono 6. Direktur Operasi : Bambang Adisurya Angkasa
Garuda’s new crew, led 7. Direktur Teknik : I Wayan Susena 7. Direktur Teknik : I Wayan Susena
by Mr. Ari Askhara is 8. Direktur Layanan : Nicodemus Panarung Lampe 8. Direktur Layanan : Nicodemus Panarung Lampe
focusing on “Quick Wins”
strategy with revenue Current management are doing the right things now, which are :
enhancement and
1) Monetizing data and brand equity (now vendors come to them instead the other
profitability improvement
way around. For example, Hoka Bento provide food in Garuda flights without
as main focus.
Garuda paying, wi-fi to be installed without any fee charges to Garuda) as part of
their revenue enhancement strategy.
2) Synergize with SOEs (for example, GIAA plans to cooperate with Pelindo II to
02 distribute fast delivery goods via airplane by using several of its airplanes as
freighters which has higher margins vs passenger flights). Company said they will
have 3 freighters ready to operate by the end of 3rd quarter this year and expect
cargo revenue to grow by 50% in 2019; a positive for GIAA since it’s cargo
segment has fatter margin relative to its passenger business according to
management.

03
Garuda Indonesia Quick
New management = new
Wins Strategy
initiatives.

Source : Company
 Financial
Review
Margin Ratios Return Ratios

01 50%
40%
30%
20

10

0
20%
10% -10
0% -20
Profitability -10%
-30
-20%
-30% -40
2014 2015 2016 2017
-50
EBITDAR Margin 13.98% 32.77% 33.12% 27.07% 2014 2015 2016 2017
Net Margin -9% 2.00% 0.21% -5.18% RoA -11.85 2.36 0.25 -5.67
Operating Margin -10% 4.02% 3.06% -2.18% RoE -41.95 8.2 0.93 -22.76

02
On the margin ratio, overall all experienced an increase from 2014 to 2017. The EBITDAR margin in
2016 to 2017 decreased due to the decline in EBITDAR, while sales experienced an increase. Net
margin in 2016 to 2017 has decreased due to the net loss generated by GIAA. Operating margin also
declined in 2016 to 2017 due to a decrease in operating profit from 2016 to 2017.

On the return ratios, in 2014 the GIAA suffered losses and the number of shareholders' equity at
least from the last 4 years so that return on equity was low. While the overall return on assets has
increased from 2014 to 2017. The decline in 2017 occurred because the total assets experienced an

03
increase but GIAA suffered a net loss.

Liquidity Ratio
0.9
0.8

Solvency 0.7
0.6
Liquidity 0.5
0.4
0.3
0.2
0.1
0
2014 2015 2016 2017
Current Ratio 0.66 0.84 0.75 0.51
Quick Ratio 0.59 0.75 0.66 0.44
Cash Ratio 0.36 0.43 0.37 0.16 Source : Company

On liquidity, the current ratio in 2015 to 2017 continues to decline due to current liabilities that
continue to increase from 2015 to 2017 and current assets declined in 2016 to 2017. The quick ratio
in 2015 to 2017 also decreased due to an increase in current liabilities and Current assets decreased
in 2016 to 2017. Cash ratios decreased from 2015 to 2017 also largely due to an increase in current
liabilities and a decrease in cash and cash equivalent in 2016 to 2017.

Solvency Ratios
5
4
3
2
1
0
-1
-2
-3
-4
-5
-6
2014 2015 2016 2017
DER (x) 1.33 1.43 1.68 1.83
DAR (x) 0.38 0.41 0.45 0.46
Interest Coverage (x) -4.89 1.21 0.77 -1.25
Financial Leverage (x) 3.54 3.48 3.70 4.01 Source : Company

On solvency, the increase in DER every year from 2014 to 2017 is caused by an increase in liabilities,
especially in current liabilities of the company and a decrease in shareholder equity in 2016 to 2017.
The increase in DAR occurs due to increased liabilities greater than assets in 2014 to 2017 but still
stable. Decrease in interest coverage from 2015 to 2017 is caused by EBIT which has decreased due
to operating expense that is greater than operating revenues (most impact from fuel price) that
caused EBIT in 2017 negative while in interest expense has increased. In financial leverage an
increase from 2015 to 2017 is caused by an increase in total assets and total equity. Equity had
experienced a decline in 2017, however, not as big as changes in assets.
 Key Risk
Unstable Oil Price
01 The price of fuel is the main influence in the airline company can be proven from
negative EBIT in 2017 and the majority is caused by rising oil prices. For now in
2019 while oil prices are falling but, it does not guarantee that it will not rise in
Unstable Oil Price the near future due to uncertainty in oil prices.
US Dollar to IDR Rate
The value of the dollar against the rupiah is not consistently influenced by the
economy in the US and Indonesia. This greatly affects debt and oil because it uses
02 US dollars.
New Management Does Not Mean Getting Better
Garuda Indonesia has new management in 2018. However, new management
does not necessarily improve the performance of the company. New
management can have a good impact but it can also have a negative impact
because it has never been tested.

New Management Does

Us Dollar
Not Mean to IDR Rate
Getting Better
Source : Company

Source : Company