GIAA: Initiation – Garuda flies high

Initiate coverage with BUY rating and Rp650 TP. Our TP is pegged to 1.2x FY13F BV, a premium to peers’ average. This is justified by GIAA’s strong earnings growth outlook (17% CAGR over FY12-14F), and is undemanding given ROE at 20% level vs peers average at 4%. The stock should rerate as the company delivers on earnings.

Air travel in Indonesia will register strong long term growth. As the world’s largest archipelago and with the middle-class projected to grow to 58% of the total population by 2015 from 46% in 2010, Indonesia will see strong air travel demand for many years. The fast-growing LCC segment in Indonesia will also drive air travel in the country.

Transforming with a younger, more efficient fleet, and growing LCC arm. GIAA is on track to double its fleet size from 95 planes to 191 by 2015, and reduce average fleet age to less than six years. This includes Citilink growing its fleet to 50 planes, and targeting 7m passengers by 2015 from 1.6m in 2011. The 14% capacity CAGR over 2011- 15F will help to drive top and bottom line growth.

Key risks: competition and infrastructure constraints. The strong growth of air travel demand has attracted more airlines to announce expansion into the premium segment. Meanwhile, the existing infrastructure is already operating at full capacity. Plans are underway to expand existing airports but until they are completed, growth will be capped.

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