Photographer: Dimas Ardian/Bloomberg

Battered Indonesian Airline Is Now a Bargain to Top Analyst

  • Share valuations are lowest among 25 regional airlines
  • Volcanic ash clouds, forest fires have affected operations

For Indonesia’s national carrier, 2015 has been a year to forget. Shares of PT Garuda Indonesia are heading for their biggest-ever annual drop, overseas debt costs are rising and flights have gotten disrupted by forest fires and an erupting volcano.

Timothy Ross, a top-ranked airline analyst at Credit Suisse Group AG, says this is the perfect time to buy.

The impact of ash clouds from Mount Rinjani and haze from burning peat forests is temporary, according to Ross, the most accurate analyst for at least four Asian airline stocks tracked by Bloomberg, including Garuda. Bears who dragged down the stock by 45 percent this year are looking past Garuda’s market-share gains from budget rivals PT Lion Mentari Airlines and AirAsia Bhd., said Ross, who predicts the company will return to a profit this year.

“There are fundamental changes in the company, and the stock price has dropped by half, so when you take the two together it makes me a little more positive,” said Ross, who projects Garuda will rebound 22 percent over the next 12 months. The Singapore-based analyst turned bullish on the shares last month for the first time in two years.

After tumbling three times faster than the benchmark Jakarta Composite Index this year, Garuda is valued at 0.7 times net assets, the cheapest level among the 25 largest Asian airlines tracked by Bloomberg. While the rupiah’s 12 percent drop in 2015 has made the company’s foreign-currency liabilities more expensive, Garuda’s debt-to-equity ratio is about half that of its regional rivals. Six other analysts have buy recommendations, giving it a perfect 5 rating on a Bloomberg scale, compared with an average of 4 for its Asian peers.

Garuda climbed 1.3 percent at the close, while the Jakarta Composite slid 1.9 percent.

Too Volatile

While analysts are bullish, the nation’s top-performing fund manager in the fourth quarter isn’t buying because he sees risks related to the rupiah and oil prices.

"The airline industry in general is too volatile and highly dependent on the exchange rate as well as oil,” said Indra Mawira, an investment manager at Panin Asset Management, whose Panin Dana Ultima fund returned 13.4 percent this quarter. “Although Garuda has structured itself as a better company, I still think it’s hard to make money out of it unless you’re trading the shares with a one to three-month horizon.”

Garuda President Director Arif Wibowo, who took over in December 2014, says some of the benefits of falling energy prices have failed to show up in the company’s fuel bill because the airline has been expanding capacity. Garuda will add 23 planes to its fleet in 2016, in addition to the 18 scheduled for this year, he said in an interview on Dec. 8, adding that the carrier will also reduce its fuel hedging.

Luring Customers

New York crude has tumbled more than 30 percent this year, reducing the price of jet fuel and helping spark a 17 percent gain in the Bloomberg Asia Pacific Airlines Index.

Garuda is luring customers after Lion Air’s cancellation record deteriorated in 2015 and an AirAsia jet crashed a year ago en route to Singapore from Surabaya, Indonesia, killing 162 people. While Indonesia has more than three times the global average rate of fatal air crashes, Garuda’s safety record is improving. The European Union lifted a flight ban on the airline in 2009 and the carrier’s last fatal accident was in 2007.

Analysts estimate Garuda’s net income this year will be $34.8 million, its first annual profit in three years. While 71 percent of the company’s $2.2 billion total short and long-term liabilities are denominated in currencies other than the rupiah, Garuda’s debt-to-equity ratio of 139 percent is well below the 236 percent average of its regional rivals.

Investor concern about Indonesia’s air safety record is overblown when it comes to Garuda, Credit Suisse’s Ross said.

"Those things impact share prices and customer behavior only for maybe a couple of months," he said. "It tends to be put in the rear-view mirror pretty quickly.”

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