Garuda Indonesia. Indonesia Company Guide

Transcription

1 Indonesia Company Guide Version 6 Bloomberg: GIAA IJ Reuters: GIAA.JK Refer to important disclosures at the end of this report DBS Group Research. Equity 3 May 2017 HOLD (Downgrade from Buy) Last Traded Price ( 2 May 2017): Rp358 (JCI : 5,675.80) Price Target 12-mth: Rp360 (1% upside) (Prev Rp435) Potential Catalyst: Sustained profitable quarters Where we differ: Lower margin assumptions than consensus Analyst Marvin KHOR marvinkhor@alliancedbs.com Paul YONG CFA paulyong@dbs.com What s New 1Q17 disappointed with heavy core losses Steep fuel cost rises, falling yields not compensated by better volumes & load factor Margin pressures to persist as cost initiatives are gradual, while competition pushes down yields Slash FY17F to losses on raised unit costs, TP to Rp360 downgrade to HOLD Price Relative Forecasts and Valuation FY Dec (US$ m) 2016A 2017F 2018F 2019F Revenue 3,864 4,187 4,563 5,016 EBITDA Pre-tax Profit 17.8 (4.7) Net Profit 8.10 (3.4) Net Pft (Pre Ex.) 9.10 (3.4) Net Pft Gth (Pre-ex) (%) (66.6) nm nm EPS (Rp) 4.15 (1.7) EPS Pre Ex. (Rp) 4.67 (1.7) EPS Gth Pre Ex (%) (67) (137) (179) 359 Diluted EPS (Rp) 4.67 (1.7) Net DPS (Rp) BV Per Share (Rp) PE (X) 86.0 nm PE Pre Ex. (X) 76.5 nm P/Cash Flow (X) EV/EBITDA (X) Net Div Yield (%) P/Book Value (X) Net Debt/Equity (X) ROAE (%) 0.8 (0.3) Earnings Rev (%): (107) (95) (83) Consensus EPS (Rp): Other Broker Recs: B: 3 S: 2 H: 5 Source of all data on this page: Company, AllianceDBS, DBS Bank, Bloomberg Finance L.P Still experiencing turbulence Poor earnings showcase belies underlying weakness. Garuda Indonesia s (GIAA) reported disappointing 1Q17 losses of US$100.3m, its largest since 4Q14, as fuel-led cost hikes overcame revenue increases. While the group is working on more cost-saving initiatives, its decreasing yields and fares indicate an inability to pass on rising costs a risk if fuel prices further escalate. Despite GIAA continuing to trade below regional peers 1-1.3x P/BV, we think its re-rating hinges on achieving more stable profitability. Downgrade to HOLD. Cost management is key focus while expansion should be put on back-burner. The group s strategic plans revolve around reducing costs via optimising fleet costs, route plans, and unit integration; plus enhancing revenue management systems. However, these gradual improvements may be stymied by the more immediate rises in jet fuel expenses, as GIAA expects up to a 26% rise in average prices to 54 UScts from 43 UScts in FY16. While the group still aims to raise capacity via improving fleet utilisation, we think it has to be judicious in new route development (especially long-haul) as insufficient yields may hurt its bottomline in a rising-cost environment. Valuation: Our target price drops to Rp360 (from Rp435) after changing our earnings estimates and reducing our P/BV multiple to 0.7x (-1SD, from 0.8x previously) FY17F book value. Key Risks to Our View: Fuel price upswing. Our forecasts assume that spot jet fuel prices will average US$60/bbl. A sustained rise will impact operational costs and earnings. At A Glance Issued Capital (m shrs) 25,887 Mkt. Cap (Rpm/US$m) 9,267,394 / 694 Major Shareholders (%) Republic of Indonesia 60.5 Trans Airways 24.6 Free Float (%) m Avg. Daily Val (US$m) 0.42 ICB Industry : Consumer Services / Travel & Leisure ed: CK / sa:ma, PY

2 WHAT S NEW Cost escalation steeper than expected, turning negative Disappointment from heavy 1Q17 losses: (GIAA) reported headline net losses of US$98.5m in 1Q17, implying a more severe US$100.3m core loss after stripping out forex gains. This contrasted poorly against the core profits of US$9.3m in 1Q16 and US$31.3m in 4Q16; disappointing our/street expectations of more stable earnings delivery. Severe cost escalation drove operational losses The key culprit was the 20% y-o-y hike in total opex to US$1.02bn, led by a 54% hike in jet fuel expenses to US$292.3m. Besides the general rise in spot prices, average jet fuel prices declared by GIAA (1Q17: 52c/litre vs 38c/litre in 1Q16) also revealed a widening of the premium it typically incurs over spot prices to c.us$19/bbl from US$15/bbl averaged last year, in our estimation. Overall, unit costs or cost/ask (available seat kilometres) were 8.5% higher y-o-y. despite better volume & capacity management offsetting yield declines. Operationally, GIAA reported better figures as RPK (revenue passenger kilometre) growth of 15.2% y-o-y outstripped capacity or ASK growth of 10.9%. Thus, load factors improved by 2.7ppts to 72.5%. Notably, RPK at its international segment led group growth for a second consecutive quarter at +26% y-o-y. However, competitive pressures still reigned as yields or average fares/rpk fell 10.5%. Group passenger revenue thus rose by a milder 3% y-o-y, and total revenues by 6.2% y-o-y trailing opex escalation and leading to losses from operations of US$112.7m. In need of more precise strategic thrusts. In its briefing, the group revealed five Quick Win Priorities centred on the optimisation of routes, costs, and system efficiencies not far different from strategic directions it used for FY16. Note that the group has a new CEO following its AGM in Apr 2017 from which we infer that strategic directions may yet be tweaked within FY17. Operationally, we also note that the group has already increased its fleet to its full-year target of 199 (+3, all to low-cost carrier unit Citilink). However, the group had earlier stated intentions of growing capacity faster from its international segment, by increasing fleet utilisation and potentially new long-haul destinations it remains to be seen if these plans are maintained with the new leadership. would be 26% higher y-o-y. While more cost savings (from its own optimisation initiatives) and the seasonal peak of 3Q/4Q may bring improved performances, we think it is a challenge to bring full-year FY17F bottomline back to the black, given the heavy setback from 1Q. Earnings risks are primarily skewed towards the downside, in particular relating to higher fuel costs as yield growth is capped by stiff competition. Revising forecasts down. We slash our FY17/18F forecasts to a US$3.4m loss and bare US$2.7m core gain, respectively, as we raise cost/ask assumptions by 1.7% after imputing effective jet fuel price premium of US$20/bbl (from US$15) over spot prices. We also trim our valuation to 0.7x FY17F P/BV (-1SD, from 0.8x or -0.5SD) given the weakened implied ROAE after changes to our estimates. This lowers our TP to Rp360 downgrade to HOLD. Core performance by quarters US$ m 1Q16 2Q16 3Q16 4Q16 1Q17 Net earnings 1.0 (64.6) (98.5) Less Forex gain/(loss) (8.3) (7.0) (6.5) Other exc's Core earnings 9.3 (57.6) (100.3) q-o-q -16% n.m. n.m. 20% n.m. Source: Company, DBS Bank Movement of fuel cost prices vs spot prices US$/bbl Estimated premium Spot jet fuel month average 0 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 Oct-16 Jan-17 Source: Company, DBS Bank Calculated fuel cost price* *based on monthly jet fuel price disclosure, converted from UScents/litre Cost base implies a bigger challenge to break even. The group disclosed that its budgeted average fuel cost, including planned hedges, was 54.3c/litre (c.us$85/bbl) for 2017 which Page 2

3 Quarterly / Interim Income Statement (US$m) FY Dec 1Q2016 4Q2016 1Q2017 % chg yoy % chg qoq Revenue (8.9) Other Oper. (Exp)/Inc (850) (929) (1,022) Operating Profit (113) nm nm Other Non Opg (Exp)/Inc (91.3) (60.9) Associates & JV Inc nm (568.1) Net Interest (Exp)/Inc (18.5) (19.5) (19.1) (3.3) 2.1 Exceptional Gain/(Loss) (8.3) nm (91.2) Pre-tax Profit (2.7) 75.1 (128) (4,680.1) nm Tax 3.50 (22.1) nm Minority Interest 0.20 (0.9) nm Net Profit (98.5) nm nm Net profit bef Except (100) nm nm EBITDA (79.0) nm nm Margins (%) Opg Profit Margins (12.4) Net Profit Margins (10.8) Source of all data: Company, AllianceDBS, DBS Bank Page 3

4 CRITICAL DATA POINTS TO WATCH Earnings Drivers: Expanding capacity, mainly for LCC and international segment. Airline capacity is measured via ASK (available seat kilometres), which is a function of the active fleet and flight distances of routes served. GIAA aims to grow group ASKs by up to 10% in FY17F after recording 13% growth in FY16. Following the trend of previous years, growth will come mostly from its low-cost carrier (LCC) arm Citilink, which now makes up 32% of overall passengers carried from 14% in For its main Garuda brand, there is likely more growth in the international segment as fleet utilisation has yet to be maximised there. The group s fleet will see three net aircraft additions this year (bringing total fleet to 199), all directed to Citilink (to 55 narrow-body planes). Expect some load factor recovery. Load factors determine the ASK that is converted into RPKs (revenue passenger kilometres). Load factors fell 3.4ppts to 73.8% in FY16, due to aggressive capacity injection, in particular during the 1H period which is the low season for Indonesia. With a more gradual capacity addition schedule, we expect average load factors to recover in FY17F to 75.5%. Overall, our assumptions imply 12.5% RPK growth in FY17F (+8.3% in FY16). Easing yields. GIAA's average passenger yields fell 6.5% y-o-y in FY16, largely due to competitive pressure on its full-service brand Garuda. At the same time, the growing share of Citilink s capacity has naturally led to lower average yields for the group. Competitive factors also played a part as main competitor Lion Air group had also ramped up capacity over the years. We assume group yields to fall 3%/1% in FY17/18F (implying - 1%/+1% in rupiah terms) as full service fares pare down. Cheaper fuel leads to cost savings. Cost/ASK fell 10.2% in FY16 on the back of a 22% fall in fuel costs/ask. However, asset and cash costs/ask had also fallen 3% and 7%, respectively, due to the group s cost saving initiatives. While fuel prices are expected to average higher going forward, we forecast a 2%/1% decline in FY17/18F total cost/ask as more efficiency savings take root. Our all-in fuel price assumption is US$80/85/bbl in FY17/18F from US$68/bbl in FY16. Its other unit cost savings will come from the higher LCC weightage, plus internal initiatives like restructuring of aircraft leases, inventory costs, and maintenance programmes. Passenger ASK (m) Passenger Yield (US c) Passenger Load Factor (%) Cost / ASK (US c) USD/IDR USD/IDR exchange rate. GIAA reports its earnings in US$, derives most revenues in rupiah, and has more than 50% of operating expenses in US$. Netting the effects, core earnings will typically be stronger with a stronger rupiah as margins will expand. In our forecasts, we employ DBS assumptions of USDIDR13,608 for FY17F, implying c.2% weakening on average in Source: Company, AllianceDBS, DBS Bank Page 4

5 Balance Sheet: Expect net gearing to remain stable. We project GIAA s net gearing to stay around the 1.2x level in FY17F, close to the 1.1x level in FY16, as it intends to finance the majority of new aircraft deliveries on operating leases rather than finance leases. As of end-fy16, 74 of its total fleet of 196 are on operating leases, and the remaining 22 are either owned or on financial leases. Share Price Drivers: Proving sustainable profitability. We think a re-rating to close the gap to GIAA s book value or its historical mean of 0.9x would be led by the display of steady profitability from its core operations. Our target price of Rp360 is based on 0.7x FY17F P/BV, or -1SD, as near-term earnings still display high risks of negative profitability. Key Risks: Destructive competition. Excessive fare competition or capacity increases by industry players pose threats to both yields and load factors. Besides the natural dilution of demand, the airline players would also drive down fares to recapture passengers. Leverage & Asset Turnover (x) Capital Expenditure ROE (%) Vulnerable to demand shocks. Airlines are susceptible to demand shocks, which could include pandemics, terrorist attacks as well as economic crises. In GIAA s situation, its primary exposure is to its domestic market in Indonesia, as well as the regional market of Southeast Asia. Fuel cost hikes. Our forecasts assume continued low oil/fuel prices. A sustained rise will impact operational costs and earnings. Company Background (GIAA) is the national flag carrier of Indonesia, focusing on passenger and cargo services. It mainly operates out of the country's main airport Soekarno-Hatta Int l Airport in Jakarta. It is majority owned by the government of the Republic of Indonesia. PB Band (x) Source: Company, AllianceDBS, DBS Bank Page 5

6 Key Assumptions FY Dec 2015A 2016A 2017F 2018F 2019F Passenger ASK (m) 51,868 58,745 64,620 71,082 78,190 Passenger Yield (US c) Passenger Load Factor (%) Cost / ASK (US c) USD/IDR 13,398 13,305 13,608 13,608 13,608 Segmental Breakdown FY Dec 2015A 2016A 2017F 2018F 2019F Revenues (US$m) Passanger 3,003 3,039 3,316 3,659 4,078 Cargo Excess Bagage Mail and Documents Others Total 3,815 3,864 4,187 4,563 5,016 Income Statement (US$m) FY Dec 2015A 2016A 2017F 2018F 2019F Revenue 3,815 3,864 4,187 4,563 5,016 Other Opng (Exp)/Inc (3,732) (3,796) (4,103) (4,466) (4,895) Operating Profit Other Non Opg (Exp)/Inc Associates & JV Inc (0.1) (0.2) (0.1) (0.1) (0.1) Net Interest (Exp)/Inc (62.0) (81.1) (98.9) (105) (112) Exceptional Gain/(Loss) 49.3 (1.0) Pre-tax Profit (4.7) Tax (28.7) (8.4) 1.20 (0.9) (4.3) Minority Interest (1.5) (1.3) 0.10 (0.1) (0.5) Preference Dividend Net Profit (3.4) Net Profit before Except (3.4) EBITDA Growth Revenue Gth (%) (3.0) EBITDA Gth (%) nm (10.4) Opg Profit Gth (%) (123.2) (18.3) Net Profit Gth (Pre-ex) (%) nm (66.6) nm nm Margins & Ratio Opg Profit Margin (%) Net Profit Margin (%) (0.1) ROAE (%) (0.3) ROA (%) (0.1) ROCE (%) Div Payout Ratio (%) N/A Net Interest Cover (x) Source: Company, AllianceDBS, DBS Bank Page 6

7 Quarterly / Interim Income Statement (US$m) FY Dec 1Q2016 2Q2016 3Q2016 4Q2016 1Q2017 Revenue , Other Oper. (Exp)/Inc (850) (963) (1,054) (929) (1,022) Operating Profit 6.40 (55.4) (113) Other Non Opg (Exp)/Inc Associates & JV Inc 0.0 (0.3) Net Interest (Exp)/Inc (18.5) (21.4) (21.7) (19.5) (19.1) Exceptional Gain/(Loss) (8.3) (7.0) (6.5) Pre-tax Profit (2.7) (75.3) (128) Tax (1.1) (22.1) 29.3 Minority Interest 0.20 (0.6) 0.0 (0.9) 0.60 Net Profit 1.00 (64.6) (98.5) Net profit bef Except (57.6) (100) EBITDA 56.3 (24.4) (79.0) Growth Revenue Gth (%) (11.7) (9.3) (8.9) EBITDA Gth (%) (14.2) nm nm 19.1 nm Opg Profit Gth (%) (69.0) (959.7) (184.7) 49.2 (261.0) Net Profit Gth (Pre-ex) (%) (15.7) (719.5) (145.2) 20.1 (420.3) Margins Opg Profit Margins (%) 0.8 (6.1) (12.4) Net Profit Margins (%) 0.1 (7.1) (10.8) Balance Sheet (US$m) FY Dec 2015A 2016A 2017F 2018F 2019F Net Fixed Assets Invts in Associates & JVs Other LT Assets 1,435 1,645 1,745 1,845 1,945 Cash & ST Invts Inventory Debtors Other Current Assets Total Assets 3,310 3,738 3,834 3,982 4,145 ST Debt Creditor Other Current Liab LT Debt Other LT Liabilities Shareholder s Equity ,005 Minority Interests Total Cap. & Liab. 3,310 3,738 3,834 3,982 4,145 Non-Cash Wkg. Capital (175) (168) (171) (167) (162) Net Cash/(Debt) (322) (588) (665) (728) (767) Debtors Turn (avg days) Creditors Turn (avg days) N/A N/A N/A N/A N/A Inventory Turn (avg days) Asset Turnover (x) Current Ratio (x) Quick Ratio (x) Net Debt/Equity (X) Net Debt/Equity ex MI (X) Capex to Debt (%) Z-Score (X) Source: Company, AllianceDBS, DBS Bank Page 7

8 Cash Flow Statement (US$m) FY Dec 2015A 2016A 2017F 2018F 2019F Pre-Tax Profit (4.7) Dep. & Amort Tax Paid (11.9) (22.5) (8.4) 1.20 (0.9) Assoc. & JV Inc/(loss) Chg in Wkg.Cap. (235) (6.3) (8.0) Other Operating CF 144 (86.7) Net Operating CF Capital Exp.(net) (233) (389) (250) (250) (250) Other Invts.(net) 0.0 (2.4) Invts in Assoc. & JV (0.5) Div from Assoc & JV Other Investing CF Net Investing CF (213) (307) (250) (250) (251) Div Paid Chg in Gross Debt Capital Issues Other Financing CF 2.80 (0.5) Net Financing CF Currency Adjustments Chg in Cash Opg CFPS (Rp) Free CFPS (Rp) (27.5) (145) (39.5) (32.3) (19.7) Source: Company, AllianceDBS, DBS Bank Target Price & Ratings History Source: AllianceDBS, DBS Bank Analyst: Marvin KHOR Paul YONG CFA Page 8

9 AllianceDBS, DBS Bank recommendations are based an Absolute Total Return* Rating system, defined as follows: STRONG BUY (>20% total return over the next 3 months, with identifiable share price catalysts within this time frame) BUY (>15% total return over the next 12 months for small caps, >10% for large caps) HOLD (-10% to +15% total return over the next 12 months for small caps, -10% to +10% for large caps) FULLY VALUED (negative total return i.e. > -10% over the next 12 months) SELL (negative total return of > -20% over the next 3 months, with identifiable catalysts within this time frame) Share price appreciation + dividends Completed Date: 3 May :12:24 (WIB) Dissemination Date: 3 May :39:17 (WIB) Sources for all charts and tables are AllianceDBS, DBS Bank unless otherwise specified. GENERAL DISCLOSURE/DISCLAIMER This report is prepared by AllianceDBS Research Sdn Bhd (''AllianceDBS''), DBS Bank Ltd. 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10 Any assumptions made in this report that refers to commodities, are for the purposes of making forecasts for the company (or companies) mentioned herein. They are not to be construed as recommendations to trade in the physical commodity or in the futures contract relating to the commodity referred to in this report. DBSVUSA, a US-registered broker-dealer, does not have its own investment banking or research department, has not participated in any public offering of securities as a manager or co-manager or in any other investment banking transaction in the past twelve months and does not engage in market-making. ANALYST CERTIFICATION The research analyst(s) primarily responsible for the content of this research report, in part or in whole, certifies that the views about the companies and their securities expressed in this report accurately reflect his/her personal views. The analyst(s) also certifies that no part of his/her compensation was, is, or will be, directly or indirectly, related to specific recommendations or views expressed in the report. The research analyst (s) primarily responsible for the content of this research report, in part or in whole, certifies that he or his associate 1 does not serve as an officer of the issuer or the new listing applicant (which includes in the case of a real estate investment trust, an officer of the management company of the real estate investment trust; and in the case of any other entity, an officer or its equivalent counterparty of the entity who is responsible for the management of the issuer or the new listing applicant) and the research analyst(s) primarily responsible for the content of this research report or his associate does not have financial interests 2 in relation to an issuer or a new listing applicant that the analyst reviews. DBS Group has procedures in place to eliminate, avoid and manage any potential conflicts of interests that may arise in connection with the production of research reports. The research analyst(s) responsible for this report operates as part of a separate and independent team to the investment banking function of the DBS Group and procedures are in place to ensure that confidential information held by either the research or investment banking function is handled appropriately. There is no direct link of DBS Group's compensation to any specific investment banking function of the DBS Group. COMPANY-SPECIFIC / REGULATORY DISCLOSURES 1. DBS Bank Ltd, DBS Vickers Securities (Singapore) Pte Ltd (''DBSVS''), their subsidiaries and/or other affiliates do not have a proprietary position in the securities recommended in this report as of 31 Mar Neither DBS Bank Ltd, DBS HK nor DBSV HK market makes in equity securities of the issuer(s) or company(ies) mentioned in this Research Report. Compensation for investment banking services: 3. DBSVUSA does not have its own investment banking or research department, nor has it participated in any public offering of securities as a manager or co-manager or in any other investment banking transaction in the past twelve months. Any US persons wishing to obtain further information, including any clarification on disclosures in this disclaimer, or to effect a transaction in any security discussed in this document should contact DBSVUSA exclusively. Disclosure of previous investment recommendation produced: 4. DBS Bank Ltd, DBS Vickers Securities (Singapore) Pte Ltd (''DBSVS''), their subsidiaries and/or other affiliates may have published other investment recommendations in respect of the same securities / instruments recommended in this research report during the preceding 12 months. Please contact the primary analyst listed in the first page of this report to view previous investment recommendations published by DBS Bank Ltd, DBS Vickers Securities (Singapore) Pte Ltd (''DBSVS''), their subsidiaries and/or other affiliates in the preceding 12 months. 1 An associate is defined as (i) the spouse, or any minor child (natural or adopted) or minor step-child, of the analyst; (ii) the trustee of a trust of which the analyst, his spouse, minor child (natural or adopted) or minor step-child, is a beneficiary or discretionary object; or (iii) another person accustomed or obliged to act in accordance with the directions or instructions of the analyst. 2 Financial interest is defined as interests that are commonly known financial interest, such as investment in the securities in respect of an issuer or a new listing applicant, or financial accommodation arrangement between the issuer or the new listing applicant and the firm or analysis. This term does not include commercial lending conducted at arm's length, or investments in any collective investment scheme other than an issuer or new listing applicant notwithstanding the fact that the scheme has investments in securities in respect of an issuer or a new listing applicant. Page 10

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12 United Kingdom This report is produced by AllianceDBS Research Sdn Bhd which is regulated by the Securities Commission Malaysia. This report is disseminated in the United Kingdom by DBS Vickers Securities (UK) Ltd, ("DBSVUK"). DBSVUK is authorised and regulated by the Financial Conduct Authority in the United Kingdom. In respect of the United Kingdom, this report is solely intended for the clients of DBSVUK, its respective connected and associated corporations and affiliates only and no part of this document may be (i) copied, photocopied or duplicated in any form or by any means or (ii) redistributed without the prior written consent of DBSVUK. This communication is directed at persons having professional experience in matters relating to investments. Any investment activity following from this communication will only be engaged in with such persons. Persons who do not have professional experience in matters relating to investments should not rely on this communication. Dubai United States Other jurisdictions This research report is being distributed by DBS Bank Ltd., (DIFC Branch) having its office at PO Box , 3rd Floor, Building 3, East Wing, Gate Precinct, Dubai International Financial Centre (DIFC), Dubai, United Arab Emirates. DBS Bank Ltd., (DIFC Branch) is regulated by The Dubai Financial Services Authority. This research report is intended only for professional clients (as defined in the DFSA rulebook) and no other person may act upon it. This report was prepared by AllianceDBS Research Sdn Bhd. DBSVUSA did not participate in its preparation. The research analyst(s) named on this report are not registered as research analysts with FINRA and are not associated persons of DBSVUSA. The research analyst(s) are not subject to FINRA Rule 2241 restrictions on analyst compensation, communications with a subject company, public appearances and trading securities held by a research analyst. This report is being distributed in the United States by DBSVUSA, which accepts responsibility for its contents. This report may only be distributed to Major U.S. Institutional Investors (as defined in SEC Rule 15a-6) and to such other institutional investors and qualified persons as DBSVUSA may authorize. Any U.S. person receiving this report who wishes to effect transactions in any securities referred to herein should contact DBSVUSA directly and not its affiliate. In any other jurisdictions, except if otherwise restricted by laws or regulations, this report is intended only for qualified, professional, institutional or sophisticated investors as defined in the laws and regulations of such jurisdictions. AllianceDBS Research Sdn Bhd ( U) 19th Floor, Menara Multi-Purpose, Capital Square, 8 Jalan Munshi Abdullah Kuala Lumpur, Malaysia. Tel.: Fax: general@alliancedbs.com Page 12