We initiate coverage on GIAA, Indonesia's state-owned airlines company with a BUY recommendation. We like the company for several reasons. First, GIAA is making efforts to maintain its growth momentum through effective strategic positioning and global linking by joining Sky Team. Secondly, GIAA's revenues performance is steadily improving. And thirdly, its newly-separated entity (Citilink) shall provide a stable revenues stream to GIAA. We value the company at Rp900/share, implying 2012-13F Adj. EV/EBITDAR of 5.6-4.7x. GIAA's shares currently trade at 5.0x Adj. EV/EBITDAR.
Maintaining its Growth Momentum
Thanks to strong economic growth in Indonesia, the overall number of domestic budget and business travelers has grown by 4- year CAGR 11% while the figure for international travelers is 13%. Focusing on the full service (FSC) market, GIAA is adopting effective strategies such as positioning itself in the high density and low yield market via Citilink, as well as serving the low density and high yield market through its new CRJ 1000 NG aircraft. In our view, this should allow GIAA to capture higher market share and allow the company to leverage on higher capacity. For the international market, more Boeing 777 aircraft are expected to be delivered by FY13 in order to offer direct international flights. Taking everything into consideration, consolidated Available Seat Kilometer (ASK) is estimated to reach 36,274 mn km and 44,186 mn km in FY12-13. Furthermore, GIAA will also seek to maintain its growth momentum by joining Sky Team by FY14.
Healthy Revenues Growth
The government has implemented price capping since FY10 to protect public interests in domestic air transport. The impact, however, for GIAA is not significant and the margin per ASK has still improved even with higher jet fuel prices paid. Encouragingly, yields have expanded even with a higher passenger load factor. The EBITDAR has grown steadily. In FY11, the operating profits reached US$115 million after a loss of around US$7 million in FY10. Going forward, we expect revenues to grow further. This should help lift operating profits to around US$ 220 million in FY12 and US$ 240 million in FY13, in our estimates.
Spreading Its Citilink Wings
Citilink is now an independent entity following the acceptance of the Air Operation Certificate (AOC) given by the Ministry of Transportation on 5 July 2012. The brand will serve the segmented LCC market with 8 daily routes from the airline's hubs to Batam, Banjarmasin, Denpasar, Balikpapan, Medan and Makasar. Going forward, Citilink is expected to provide a stable revenues stream to GIAA with the introduction of A320-200 using the LCC configuration supported by GIAA's long-standing experience in the airlines sector. This will help Citilink to post higher passenger revenues, rising an estimated CAGR 96% over 2 years, in our view.
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