Equity Research

Company Update

Tuesday,06 March 2018

BUY Garuda Maintenance Facility (GMFI IJ)

Initiation
Last price (IDR)
Target Price (IDR)
Upside/Downside
Previous Target Price (IDR)
Stock Statistics
Sector
Bloomberg Ticker
No of Shrs (mn)
Mkt. Cap (IDRbn/USDmn)
Avg. daily T/O (IDRbn/USDmn)
Major shareholders (%)
Garuda Indonesia
Estimated Free Float
EPS Consensus (USD Cents)
2018F
Danareksa
Consensus N/A
Danareksa/Cons N/A
GMFI relative to JCI Index
Source : Bloomberg
Heading in the right direction
386 Garuda Maintenance Facility Aero Asia Tbk (GMFI) is the largest maintenance,
480 repair, and overhaul company in Indonesia with a domestic market share
reaching 32% in value terms. GMFI plans to become a top-10 MRO company
+24.4%
globally by achieving organic growth in its captive and new markets whilst
N/A also pursuing inorganic expansion. We initiate with BUY recommendation and
target price of IDR480 (based on DCF valuation)
Airlines The largest MRO (maintenance, repair, and overhaul) company in Indonesia.
GMFI is the largest MRO (maintenance, repair and overhaul) company in
GMFI IJ
Indonesia with around 84% of its revenues generated from its captive market.
28,234 GMFI dominates the domestic MRO market, holding a 32% market share. The
10,898/792 local MROs have combined market share of about 49% of the domestic MRO
3.6/0.3 market, while remaining 51% of the domestic MRO market is held by foreign
MROs/OEMs with market share of less than 5% each.
In expansion mode to become a top 10 MRO company globally. The company
90.0% seeks to become a top 10 MRO company globally by 2020 through the provision
10.0% of integrated and reliable aircraft maintenance solutions in its captive and non-
captive markets. Besides the strong expected growth of its organic business
from its captive market (Garuda Indonesia, Citilink and Sriwijaya), GMF plans to
enlarge its inorganic business through partnerships with other international
2019F 2020F MROs. The expansion in its inorganic business involves: a) forming strategic
0.2 0.2 0.3 alliances with Air France Industries KLM Engineering & Maintenance (AFI KLM
E&M) in 2017, b) forming partnerships for developing base maintenance
N/A N/A
hangars, and c) forming partnerships with OEM/MRO.
N/A N/A
A Compelling Domestic MRO amid the challenging global outlook. The MRO
business in Indonesia is expected to post breakneck growth given that
Indonesia is a vast archipelago, meaning it is heavily dependent on air
transportation to bring people and goods to its islands. Based on data supplied
by CAMRO, the total MRO business in Indonesia is expected to grow by 4-year
CAGR of 11% in 2017 – 2021. In addition, with GMF’s operational areas located
in high growth MRO markets like the Asia Pacific, GMF is well placed to expand
its business further.
Initiate coverage with a BUY call. We initiate coverage on GMFI with a BUY call
and target price of IDR480 (based on DCF valuation and WACC of 10.8%). We
like the company given its expansion through organic and inorganic growth and
the compelling domestic MRO business which will enlarge GMFI’s customer
base beyond Garuda group affiliates. The stock also trades at an undemanding
valuation compared to its regional peers. Our target price implies 16.8x 2018F
PE.

Key Financials
Year to 31 Dec 2016A 2017A 2018F 2019F 2020F
Revenue (USDmn) 389 439 496 580 687
EBITDA (USDmn) 94 78 105 125 144
EBITDA Growth (%) 58.8 (17.1) 34.7 18.1 15.2
Net profit (USDmn) 53 51 61 68 76
EPS (USDCents) 0.2 0.2 0.2 0.2 0.3
EPS growth (%) 27.4 (4.7) 18.9 12.3 12.1
x Stefanus Darmagiri BVPS (USDCents) 0.6 1.1 1.3 1.5 1.8
(62-21) 29 555 831 DPS (USDCents) 0.0 0.0 0.0 0.0 0.0
stefanus.darmagiri@danareksa.com
PER (x) 14.8 15.5 13.1 11.6 10.4
PBV (x) 4.6 2.6 2.2 1.8 1.6
Dividend yield (%) 0.0 0.0 1.3 1.5 1.7
EV/EBITDA (x) 9.2 10.3 7.8 6.5 5.4
Source : GMFI, Danareksa Estimates
www.danareksa.com See important disclosure at the back of this report 1
 Exhibit 1. Revenues and Growth Exhibit 2. Net Profits and Growth

Source: Company, Danareksa Sekuritas estimates Source: Company, Danareksa Sekuritas estimates

Exhibit 3. Margins Exhibit 4. Gearing Level

Source: Company, Danareksa Sekuritas estimates Source: Company, Danareksa Sekuritas estimates

www.danareksa.com See important disclosure at the back of this report 2

 VALUATION

Initiate coverage with a BUY call. We initiate coverage on GMFI with a BUY call
and target price of IDR480 (based on DCF valuation and WACC of 10.8%). We like
the company given:
a) The largest MRO company in Indonesia holding a 32% market share.
b) Organic growth expansion through the improvement of its capabilities.
Recently, the company signed a USD600mn agreement with CFM-I to
improve its capabilities in engine maintenance for B737NG.
c) Inorganic growth through the formation of joint ventures with overseas
MRO. The company signed an agreement with AFI-KLM E&M in 2017 to
expand its markets.
d) Enlarged customer base beyond Garuda group affiliates. The company
is expected greater revenue contribution from non-Garuda group
affiliates of around 48% in 2018 (2017: 37%)
e) The new strategic partner (with up to a 20% stake through new shares
issuance and existing shares divestment) is expected to further improve
GMFI’s new capabilities in the area of engine and components
maintenance.
f) At the current share price, GMFI’s PE valuation is 32.5% cheaper relative
to its regional peers with a simple average of 19.4x 2018F PE given the
challenging global MRO outlook. Our target price implies 16.8x 2018F
PE.

Exhibit 5. Peers’ comparison

Price Market ---- PE ---- EV/EBITDA ---- PB ----
Company Country Ticker 27-Feb-18 Cap 2018F 2019F 2018F 2019F 2018F 2019F
(LC) (US$m) (x) (x) (x) (x) (x) (x)

Regional MRO
SIA Engineering Singapore SIE SP 3.29 2,783 20.5 18.9 23.7 19.1 2.3 2.3

ST Engineering Singapore STE SP 3.44 8,108 18.2 16.7 12.7 12.1 4.4 4.2

Hong Kong Aircraft Engineering Hong Kong 44 HK 47.80 1,016 N/A N/A N/A N/A N/A N/A

Simple Average Regional MRO 19.4 17.8 18.2 15.6

Source: Bloomberg as of 28 February 2018

www.danareksa.com See important disclosure at the back of this report 3

 THE LARGEST DOMESTIC MRO PLAYERS

Garuda Maintenance Facility Aero Asia (GMFI) was originally established in 1949
as the Technical Division of Garuda Indonesia Airlines at the Kemayoran and
Halim Perdanakusuma airports in Jakarta, Indonesia. In 1984, GMF was
relocated to Soekarno-Hatta International Airport and rebranded itself as the
Division of Maintenance & Engineering (M&E). The division eventually
developed into an independent business unit in 1998 to handle the entire
activities for the fleet maintenance of Garuda Indonesia (GA) so that the parent
company could focus on its core business as an airline operator.

In 2002, Garuda span off SBU-GMF to become the subsidiary of Garuda with its
name changed to Garuda Maintenance Facility Aero Asia. GMF is currently 99%
owned by Garuda and 1% by Aero Wisata. After the recent IPO, the public holds
a 10% stake in the company, with the remaining 90% owned by Garuda Group.

Exhibit 6. GMFI’s structure

PT Trans Airways
60.5%
Government of 25.6%
Republic Indonesia 13.9%
Public

89.10% 0.90%
PT Garuda Indonesia (Persero) Tbk PT Aerowisata Public 10%

PT Garuda Maintenance Facility Aero Asia Tbk.

Source: Company

Dominating the domestic MRO market. GMF dominates the domestic MRO
market, holding a 32% market share. Including the 15% market share of Batam
Aero Technic (BAT) and the market share of other local MROs, the local MROs
therefore have combined market share of about 49% of the domestic MRO
market. At the same time, the remaining 51% of the domestic MRO market is
held by foreign MROs/OEMs with market share of less than 5% each.

www.danareksa.com See important disclosure at the back of this report 4

 Exhibit 7. GMF’s market share of the domestic MRO market stands at 32%
CFM Lufthansa Rolls-Royce ST Aerospace Eng.
International Technik 3% 2%
4% 2%

GMF AeroAsia
32%
Other Foreign
MROs/OEMs
35% Batam Aero
Technic (BAT)
15%
Other Local
SR Technics Turkish Technic MRO's
3% 2% 2%
Source: CAMRO 2016

Its main business activities are Maintenance, Repair and Overhaul. The
company’s main activities consist of line maintenance, base maintenance,
components services and engine maintenance. Furthermore, the main business
supported by other business, such as engineering services, material and logistics
services, learning services, power services and Ground Support Equipment
(GSE).
a. Line Maintenance. The company provides Line Maintenance services
for domestic and international flights at Soekarno – Hatta (CGK) Airport
in Banten Province. The Line Maintenance carries out aircraft
maintenance, such as Pre-Flight Checks/Before Departure Check, Transit
Checks, Daily Checks, and A Check for certain aircraft. Besides providing
maintenance for Garuda group, line maintenance also provides services
for non-Garuda customers, especially in Cengkareng and the Denpasar
line maintenance station. GMF has Line Maintenance at 44 domestic
airports in Indonesia and 3 international airports in Singapore, Kuala
Lumpur and Jeddah.

Exhibit 8. Domestic line maintenance stations

1. Cengkareng – T1 16. Timika 31. Pangkal Pinang
2. Cengkareng – T2 17. Biak 32. Palangkaraya
3. Cengkareng – T3 18. Semarang 33. Palu
4. Palembang 19. Solo 34. Tarakan
5. Pekanbaru 20. Surabaya 35. Ternate
6. Padang 21. Jogjakarta 36. Berau
7. Banda Aceh 22. Denpasar 37. Bengkulu
8. Kualanamu 23. Lombok Praya 38. Tanjung Pandan
9. Batam 24. Tanjung Karang 39. Halim Perdanakusuma
10. Makasar 25. Ambon 40. Manokwari
11. Manado 26. Bandung 41. Sorong
12. Balikpapan 27. Jambi 42. Merauke
13. Pontianak 28. Kendari 43. Jember
14. Banjarmasin 29. Kupang 44. Tanjung Pinang
15. Jayapura 30. Malang
Source: Company

b. Base Maintenance. Supported by three (3) hangar facilities and

workshop, the Base Maintenance can conduct a heavy check routine,
major modifications, aircraft exterior painting to decorative finishing,

www.danareksa.com See important disclosure at the back of this report 5

 modification, repair of large structures, as well as aircraft maintenance
and overhaul. This division conducts maintenance events such as C-
Checks, D-Checks, major modification, squawk rectification and
painting.

c. Component Services. The component services have two main services

activities: i) Component Management (Integrated Component Services),
which provides a total solution in relation to components, which
includes loans, exchange, repair management, spares management,
warranty management, engineering solutions, sourcing and pooling.
And ii) Component Repair (Single Component Services), which focuses
on the component services processes which comprise of Avionics
Workshop, Electro Mechanical and Oxygen Workshop, Wheel, Brake
and Landing Gear Shop as well as the Calibration and Non-Destructive
Test (NDT) Workshop.

d. Engine Maintenance is undertaken aircraft engine maintenance and

Auxiliary Power Unit (APU). The engine maintenance treatment is
divided into two categories. Firstly, on-wing engine maintenance
(considered as light treatment), which is conducted when the engine is
mounted on the plane. Secondly, for off-wing engine maintenance
(considered as moderate to heavy treatment as the engine is removed
from the aircraft). GMF managed to obtain engine overhaul certification
for the B737 family (CFM56-3) and B737 NG (CFM56-7) as well as hot
section inspection for ATR-72. By 2018, GMF is expected to improve its
engine capabilities to overhaul engines for the A320 series (CFM56-5).

Exhibit 9. GMF Business Portfolio

Line Base Component Cabin Engine & APU

Maintenance Maintenance Services Maintenance Maintenance

Engineering Material & Logistic GMF Aircraft GMF Power Learning

Services Services Support Services Services Services
Source: Company

www.danareksa.com See important disclosure at the back of this report 6

 GROWTH STRATEGY: IN EXPANSION MODE

To achieve the management’s target of becoming a top 10 MRO globally, GMF

is eyeing strong revenues growth from its organic and inorganic businesses.
Expansion of its organic business involves raising capacity, adjusting rapidly to
new technology, and improving GMF’s ability to generate more revenues from
captive and non-captive markets. At the same time, GMF also plans to form
partnerships with other international MROs to support its inorganic growth.
Through such partnerships, GMF should be able to tap new captive markets and
penetrate new service regions.

Expanding its organic business

Owning the biggest hangar in the world for narrow body aircraft. In 2015, GMF
started to operate its 4th hangar worth ~USD50mn (~IDR 550bn). The new
hangar is located in Soekarno Hatta Airport, Banten covering an area of
66,940M2. The hangar can accommodate 16 narrow body aircraft at once for
treatment of mild and severe, winglet modification, structural repairs,
modification of aircraft interiors, painting, and other maintenance. Hangar 4 is
the biggest narrow body aircraft hangar in the world, larger than Turkish
Technic’s hangar in Turkey. GMF currently operates 4 hangars with total area of
132,000 sqm.

Exhibit 10. GMF has 4 hangars at Soekarno Hatta Airport

Source: Company

Huge hangar capacity to support its business. GMF’s area of services includes
40 representative areas across Indonesia and 5 international representative
offices. GMF plans to expand its capacity by adding lines at its existing hangars
and by developing new hangars. Of four hangars owned, GMF is able to
accommodate 5 wide body aircraft and 15 narrow body aircraft excluding 1 line
dedicated for the body painting of small aircraft such as A320 and A330. Some
aircraft types that can be handled by the company are: ATR-72, CRJ-72, CRJ-
1000, B737 family, B747, B777, A320 family, and A330.

www.danareksa.com See important disclosure at the back of this report 7

 Exhibit 11. Four hangars to support the business
Hangars Location Area Normal Capacity
(sqm)
1 Hangar 1 Soekarno Hatta International Airport, Banten 22,000 Base Maintenance: up to 2 wide-body aircraft
2 Hangar 2 Soekarno Hatta International Airport, Banten 23,000 For line maintenance checks
3 Hangar 3 Soekarno Hatta International Airport, Banten 23,000 Base Maintenance: up to 3 wide-body aircraft
4 Hangar 4 Soekarno Hatta International Airport, Banten 66,940 Base Maintenance: up to 15 narrow-body aircraft + 1 line
for body painting
Source: Company

Enlarging customer base. The number of GMF’s customers increased at 3-year

CAGR of 9.3% from 145 customers in 2014 to 183 customers in 2017 with GMF’s
customers consisting of full-service carriers, low-cost carriers, cargo operators,
other MRO, lessor customers, chartered aircraft operators and non-airlines.

Going forward, the company is expected to enlarge its customer base beyond
Garuda group affiliates to around 48% of GMFI’s total revenues in 2018. The
non-Garuda group affiliates revenues contribution is expected to increase
further to 55% by 2021. As of 2017, Non-Group affiliates revenues accounted for
about 36.6% of total revenues. In 2017, the company managed to obtain new
customers, such as Xiamen Air, K-Mile, Biman Bangladesh Airlines, Jeju Air, Sky
Angkor Airlines, Indigo, Cebu-Pacific, Aerotrans Cargo, Trans Nusa, Easter Jet and
Ero Eagle Aviation.

Exhibit 12. Expect a greater contribution beyond Garuda-Group Affiliates

USD mn GMF Group affilation vs Non-group
26 30 43 310 527

52%
63%
74% 74% 71%

48%
37%
26% 26% 29%

2014 2015 2016 2017 2018F

Non-group Affilation (Historical) Group Affilation (Historical)
Non-group Affilation (Forecast) Group Affilation (Forecast)

Source: Company

Improving its capabilities and capacities. To increase its market from current
customers as well as to entice new customers, the company plans to improve its
capabilities and capacities. In the next three years, GMF plans to develop full
capabilities for B737 Max and A320 Neo in the area of line, base, engine and
cabin maintenance. This will be in-line with the strategy of Group affiliations,
which are expected to receive new aircraft in the near future and in order to
absorb all the maintenance budget from captive customers.

Meanwhile, GMF’s capacity expansion program includes all lines of its

maintenance services. This involves expanding capacity in base maintenance (for
narrow body and wide body aircraft), line maintenance, component services,
engine maintenance, and APU maintenance. The capacity of the component
services and line maintenance are derived from the amount of manpower, while

www.danareksa.com See important disclosure at the back of this report 8

 the capacity of maintenance and engine maintenance are derived from the
number of production lines.

Signed a USD600mn agreement with CFM International. GMFI recently signed

a USD600mn agreement with CFM International (CFM-I) with the intention to
increase its capabilities in the engine maintenance for the CFM 56-7 engine type
for B737NG. Hence, GMFI will be able to conduct engine maintenance for
Garuda Indonesia (GIAA) B737NG series instead of sub-contracting the engine
maintenance overseas.

Exhibit 13. GMF Current and Plan Capabilities

Source: Company

Having competitive manpower costs. One of GMF’s competitive advantages is

that it has competitive manpower costs. This means it is able to attract more
customers since it can effectively compete against other regional MROs. Most
of the MRO business is human capital intensive. In general, manpower costs in
Indonesia are among the lowest in South East Asia. However, GMF manages to
provide good quality services to its customers since the MRO business is highly
regulated. All MRO companies need to meet standards set by domestic and
international aviation authorities. GMF holds certificates issued by FAA of the
USA, EASA of Europe, DGCA of Indonesia, CASA of Australia, and more than 25
other certificates from other countries.

Supported by more than 4,745 employees as of 1Q17. The revenues of GMF

are highly correlated to its number of employees. In-line with rising revenues,
the number of GMF’s employees increased on average by 9.3% per-annum to
4,604 employees in 2016. Since then, the number of employees has increased
further to 4,745 people, consisting of permanent employees (87.1%) and non-
permanent staff (12.9%)

www.danareksa.com See important disclosure at the back of this report 9

 Exhibit 14. Average monthly minimum wages Exhibit 15. Rising number of employees
USD/month employees

800 761 Permanent Non-Permanent Total

5,000
700
600 4,000
500
3,000
400
300 263
218 219 2,000
200 148 160
100 1,000

0 0
Vietnam Indonesia Malaysia Philippines Thailand Singapore
2014 2015 2016 1Q17
Source: National Statistics Bureau of respective countries Source: Company

Better margins than its peers. GMF has superior margins with an EBITDA margin
of 24.3% in 2016 compared to its regional peers, such as SIA Engineering
Company (SIAEC) with a 10.8% EBITDA margin, ST Engineering (STE) with a 11.5%
EBITDA margin and Hong Kong Aircraft Engineering Company Limited (HAECO)
with a 10.4% EBITDA margin. GMF’s better margins owe mainly to: a) having
competitive manpower costs in the region and b) enjoying the strongest
revenues growth among its peers, supported by the rapid expansion of GMF’s
captive market.

Exhibit 16. Strong revenue growth in the region Exhibit 17. Superior EBITDA margin compared to peers
% yoy GMF SIAEC %
GMF SIAEC
80.0 ST Engineering HAECO
ST Engineering HAECO
LufthansaTechnik 30.0 LufthansaTechnik
60.0
25.0

40.0 20.0

15.0
20.0
10.0
0.0
5.0

-20.0 0.0
2011 2012 2013 2014 2015 2016 2011 2012 2013 2014 2015 2016

Source: Bloomberg, Respective Companies Source: Bloomberg, Respective Companies

Inorganic Growth
GMF is looking to generate additional revenues through inorganic schemes. The
company has grouped its inorganic business into three categories: a) forming
strategic alliances with Air France Industries KLM Engineering & Maintenance
(AFI KLM E&M). b) forming partnerships for developing base maintenance
hangars, and c) forming partnerships with other strategic partners.

Strategic alliances with AFI KLM E&M. Given GMF’s competitive positioning and
MRO business opportunities, there exists the potential for the entities to
establish mutual business. This is in line with the company’s business strategy to
develop the capabilities and capacity to penetrate both the domestic and
international markets by combining its unique selling propositions.
The company signed a strategic partnership with AFI KLM E&M in 2017 to form
a strategic alliance aimed at developing MRO business, including but not limited

www.danareksa.com See important disclosure at the back of this report 10

 to airframes, engines, and components, to serve the market with high quality
maintenance solutions. In the aeronautics maintenance market, AFI KLM E&M
ranks number two globally among the multi-product players.
GMF managed to overhaul 2 (two) KLM B7477 aircraft on schedule at good
quality. In return, AFI will assist GMFI to develop capabilities in the GE90 engine
on wing support for Garuda’s Boeing 777 as well as other potential customers in
the region.

Forming partnerships for developing base maintenance hangars. GMF plans to

expand its base maintenance services by developing new hangars both at home
and aboard. As part of strategic initiatives in 2018, the company plans to develop
the JV Batam Facility in Batam. The management expects that the hangar facility,
which will be fully operated in 2019, will focus on the maintenance of aircraft
from premium/legacy airlines. Also, in 2018, the company will further reinforce
inorganic growth in Indochina/East Asia through hangar construction for
airframe maintenance, which will be fully operated by 2019. East Asia expansion
will handle narrow-body aircraft, such as the B737 series and A320 series.

Forming partnerships with other OEMs/MROs. To address the challenges

presented by OEMs which are currently embracing the MRO business with their
own technology, GMF has several initiatives to form JO/JV with OEM (original
equipment manufacturers). Through such partnerships, GMF can potentially
master the technology owned by OEMs and open up new business opportunities
in domestic and regional markets. Cooperation with OEMs is currently focused
on the line maintenance area, base and components. For 2018, several strategic
initiatives will be: a) Australia expansion – by conducting a strategic partnership
with the local partner to handle line maintenance work in Australia and b)
Middle East and North Africa (MENA) expansion to handle line and component
maintenance.

Plans to spend capex of USD335mn by 2021. To realize its goals, GMF has
earmarked USD335mn on capex up to 2021, including USD158mn allocated in
2018. The planned increase in capacity is mainly for hangars to accommodate
growth. Meanwhile, operational capex mainly covers recurring tooling
expenses, IT expenses, and the replacement of assets. Inorganic initiatives cover
geographical expansion, its portfolio department, and operations. The bulk of
the IPO proceeds will be used to fund GMF’s growth.

Exhibit 18. Planned capex for 2018 – 2021

USDmn Inorganic initiatives Organic Initiatives
180
160
140
120
100
80
60
40
20
0
2018F 2019F 2020F 2021F

Source: Company, Danareksa Sekuritas Estimates

www.danareksa.com See important disclosure at the back of this report 11

 Seeking a strategic partner of a maximum 20% to further improve its
capabilities. GMFI has completed the strategic investors process and the
company plans to sell off a maximum 20% stake to a strategic partner. This will
encompass 10% new shares issuance and another 10% divestment of the
existing shares of its parent company, GIAA. For the new shares, GMFI will issue
up to 2,823.4mn shares, equivalent to 10.0% of its current outstanding shares of
28,233.5mn shares. This will result in 9.1% dilution. From the strategic partner,
a global MRO player, GMFI is expected to gain new capabilities mainly in engine
and components maintenance. The company is expected to announce the
strategic partner in the near future after which it will seek shareholders’
approval in March 2018.

www.danareksa.com See important disclosure at the back of this report 12

 INDUSTRY: COMPELLING DOMESTIC PROSPECTS

The Maintenance, Repair and Overhaul (MRO) business is a vital part of the
aviation industry as it performs essential maintenance to ensure the
airworthiness of the aircraft whilst also optimizing their utilization. As such, the
development of the MRO industry in Indonesia largely hinges on the prospects
for the aviation industry in the country as well as in some other parts of the
world.

Global and domestic economic conditions determine the aviation industry’s

prospects. The aviation industry’s prospects are also determined by global
economic developments. With personal incomes increasing combined with the
deregulation of global travel following the open-skies agreement and
improvements in service quality, demand for air travel will grow more briskly
than overall GDP growth. Based on projections made by the International
Monetary Fund (IMF), global economic growth is expected to increase to 3.7%
yoy in 2017 and to 3.9% yoy in 2018 (2016: 3.2% yoy). This reflects: a) recovery
in commodity prices, b) the continuation of policy support in China and c) solid
economic growth in emerging and developing countries in Asia, which is
expected to reach 6.5% yoy in both 2017 and 2018.

Exhibit 19. Global developed countries economic growth Exhibit 20. Developing Asia countries economiv growth
% %
6.0 10.0

4.0
8.0

2.0

6.0
0.0

4.0
(2.0)
2012 2013 2014 2015 2016 2017E 2018F 2019F
2012 2013 2014 2015 2016 2017E 2018F 2019F
Global Advance Economic Emergind and Developing Asia China India

Source: IMF Source: IMF

Bright outlook for air transportation in Indonesia as an archipelago nation. As

an archipelago nation, Indonesia needs either air transportation or sea
transportation for travel and to transport goods between islands. As such,
Indonesia’s GDP growth for air transportation has been above the total GDP
growth, with the exception of 2008 when the country was hit by the impact of
the sub-prime crisis (negative growth in global GDP of around 0.1%) and in 2013
when the economies of developed countries recorded anemic growth. It should
also be noted that Indonesia has a large potential market given that it is the
world’s fourth-largest country in population terms after China, India, and the
United States.

While the ratio of air transportation GDP to total GDP is relatively small (only
0.7% in 9M17), it nonetheless accounts for about 20.3% of total transportation
GDP. This figure is up from 9.5% in 2000 after the introduction of low-cost
carriers (LCC) in the beginning of 2000. Given that Indonesia’s economic growth
will reach around 5.3 – 5.4% yoy in 2018 and 5.4 – 5.5% in 2019, there will be a
commensurate increase in air transportation GDP growth.

www.danareksa.com See important disclosure at the back of this report 13

 Exhibit 21. Indonesia’s GDP growth and GDP air transportation Exhibit 22. Component of GDP transportation
% Railway
20.0 transport
1%
16.0 Ferry Air
transport transport
12.0 3% 20%

8.0

Land
4.0 transport
Sea
66%
transport
0.0
2005 2007 2009 2011 2013 2015 9M17
10%
Air Transport GDP GDP Total

Source: Central Bureau Statistics Source: Central Bureau Statistics

Increasing airline traffic… Over the next 20 years (2016 – 2035), Boeing and
Airbus expect passenger traffic to expand further due to: a) the growing middle
class in the emerging and developing markets, b) liberation, such as open skies
policy and the implementation of new low-cost carrier (LCC) business models, c)
simplification of immigration procedures and d) tourism. With the Asia region
having great economic potential, the region is expected to lead the way in terms
of airlines traffic over the next 20 years. This will be reflected in the expansion
of airport capacity and airlines.

Exhibit 23. Boeing and Airbus foresee increasing airline traffic (2016 – 2035)
RPK growth % Boeing Airbus
7
6
5
4
3
2
1
0
Asia North Europe Middle Latin CIS Africa World
America East America
Source: Boeing and Airbus

…will lead to the delivery of more aircraft in the future. Increasing airline traffic
will lead to the delivery of more aircraft in the future. Based on the latest study
conducted by Oliver Wyman, the size of aircraft fleets is expected to increase by
5-year CAGR of 3.8% in 2017 – 2022. By region, the main growth in new aircraft
numbers will come from Asian countries, with India expected to see growth of
5-year CAGR of 11.9% owing to the low-base of the size of its fleet and China
with expected growth of 5-year CAGR of 10.6% in anticipation of rising air-travel
demand on the back of the growth in middle income consumers in those
countries which will make flying more affordable. However, the growth in
aircraft numbers in mature markets such as North America is expected to remain
modest at 5-year CAGR of 0.9%.

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 Exhibit 24. Expect larger aircraft fleets… Exhibit 25. …with most of the growth coming from Asia
units 5-year CAGR 2017 - 2022
40,000
India
China
35,000 Middle East
Asia Pacific
30,000 Westn Europe
Latin America

25,000 North America

Africa
Eastern Europe
20,000
2017 2022 2027 -2.0% 0.0% 2.0% 4.0% 6.0% 8.0% 10.0%12.0%14.0%

Source: Oliver Wyman Source: Oliver Wyman

Maintenance costs are part of the airline cost structure. Based on data
provided by ICF in 2015, maintenance costs typically constitute around 15 – 18%
of an airline’s operating costs depending on the timing of airframe heavy checks
and engine overhauls, and the age of the fleet. Engine maintenance is the largest
component (40%) in the airline’s MRO cost breakdown followed by component
services (22%) and base maintenance (21%). Base maintenance consists of
airframe and modifications.

Exhibit 26. Maintenance costs in an airlines’s cost structure Exhibit 27. Typical MRO cost breakdown

Aircraft Depreciation, 5% Modifications, 6%

Rent, 3% Labor &
Benefit,
28%

Other, Airframe,
14% 15%
Engines,
40%

Maintenance,
16% Line, 17%

Component,
22%
Fuel, 35%

Source: ICF International Source: ICF International

Moderate MRO growth in the global market. The global MRO market is
expected to grow in the future given the increasing size of airline fleets. The
value of the global MRO market is expected to reach USD74bn in 2017, growing
by 4-year CAGR of 4.8% to USD89.6bn by 2021. However, growth in mature MRO
markets, such as those in North America and Europe, is expected to remain
lethargic over the next five years.

Breakneck growth in certain regions. With more new aircraft delivered to Asia
and to developing countries outside Asia over the next five years, the MRO
industry in Asia and the Middle East will be positively impacted. The growth in

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 these two regions is expected to outpace the total MRO global market growth.
China will have the largest MRO market in Asia, with a contribution of around
34.5%. The total MRO market in China was around USD6.4bn in 2017. This figure
is expected to grow by 4-year CAGR of 11.4% to USD9.9bn by 2021.

As an archipelago nation, travel between Indonesian islands is either by air or

sea. With a burgeoning middle class, more travel will take place by air. Hence,
the total value of MRO in Indonesia is expected to grow by 4-year CAGR of 11.3%
in 2017 to 2021. The total MRO market value in South East Asian countries
(excluding Indonesia) is expected to post breakneck growth of 4-year CAGR of
around 8.7% from an estimated USD3.3bn in 2017 to USD4.6bn in 2021. As
GMF’s operational areas cover high growth MRO markets (Indonesia and
regionally), GMF is well placed to expand its business further.

Exhibit 28. Global MRO market value growth (2017 – 2021) Exhibit 29. Growth will come from India, China and Indonesia

6%
5%
5% 14% 12.6%
5%
12% 11.3% 11.4%
4%
10% 8.7% 8.8%
3%
2% 8%
2%
2%
1% 6%
1% 4.0%
4%
0%
2%
World North South Europe Africa
Indonesia Other China India Other Middle
America America
SEA APAC East

Source: CAMRO Source: CAMRO

The domestic MRO industry is expected to grow by 11% CAGR in 2017-21. The
domestic MRO industry is expected to be worth USD1.2bn in 2017 or up by
20.8%yoy from USD1.0bn in 2016. The industry is expected to grow by 11% CAGR
to USD1.7bn by 2021 with component services to contribute 41.2%, followed by
line maintenance (26.5%), engine maintenance (18.6%) and base maintenance
(13.7%).

Exhibit 30. Value of Domestic MRO

Airframe Heavy Components Engine Maintenance
USDmn Line Maintenance Modifications
1,800
1,600
1,400
1,200
1,000
800
600
400
200
0
2017F 2018F 2019F 2020F 2021F
Source: CAMRO, 2016

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 Characteristics of the MRO business. The characteristics of the MRO business
depend on several factors. Firstly, the MRO business is highly reliant on captive
airlines. About 50% of the revenues of global MRO players - such as AFIKLM and
SIAEC - come from captive airlines. For GMF, around 84% of its revenue from
captive market (2016). Secondly, this business is unlike the airlines industry
business. Regardless of macroeconomic conditions, the MRO business is less
risky than the airlines industry since aircraft need constant maintenance. Thirdly,
MRO is a highly-regulated industry where industry certification is paramount
because of safety regulations. Lastly, the MRO industry is obliged to adopt the
latest technology. For the latest generation of aircraft, maintenance intervals are
longer and data generation capability is greater.

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 FINANCIALS

Greater Contribution from Non-Group affiliates to boost net profits. We

expect GMF to book net profits growth at 3-year CAGR of 14.3% in 2017 – 2020.
This will be supported by higher revenues, which are expected to increase at 3-
year CAGR of 16.6%. The company expects a greater revenues contribution from
Non-Group affiliates. In 2018, the revenues contribution from Non-Group
affiliates is expected to increase to 48% (2017: 36.7%) and by 2021, the figure is
expected to reach 55%.

Exhibit 31. Expect net profit to increase at 3-year CAGR of Exhibit 32. …backed by higher revenue at CAGR of 16.6%
14.3%...

USD mn yoy growth USD mn yoy growth

80 120% 800 30%
70 100% 700
25%
60 80% 600
50 20%
60% 500
40 400 15%
40%
30 300
20% 10%
20 200
10 0% 5%
100
0 -20% 0 0%
2013 2014 2015 2016 2017 2018F 2019F 2020F 2013 2014 2015 2016 2017 2018F 2019F 2020F
Source: Company, Danareksa Estimates Source: Company, Danareksa Estimates

2017: Lower net profits in the absence of positive adjustments to employee

benefits. Although revenues rose by 13.0% yoy, GMFI reported 11.8% yoy lower
net profits of USD51mn in 2017. This mainly owed to: a) 45.4% yoy higher staff
expenses in the absence of positive adjustments to employee benefits. The
company made changes to the post-employment benefits scheme in 2016,
which resulted in positive adjustments to employee benefits of USD15mn vs.
employee benefit expenses of USD9mn in 2017.

Higher revenues from non-Group affiliates. In 2017, GMFI reported 13.0% yoy
higher revenues of USD439mn. This was mainly due to higher revenues from
Non-Group affiliates (+41.2% yoy), whereas the revenues from Group affiliates
only edged up by 1.4% yoy. While the contribution from Non-Garuda group
affiliates jumped to 36.7% in 2017 (2016: 29.3%), most of GMFI’s revenues were
still generated by the Garuda Indonesia group (Garuda Indonesia and Citilink) –
about 63.4% of revenues in 2017.

Exhibit 33. Strong revenue from repairs and overhaul Exhibit 34. Garuda group remains the largest contributors (2017)
USD mn Line Maintenance Repair and Overhaul
500

400
Others
300 37%
Garuda
200 Indonesia
54%
100
Citilink
0
9%
2011 2012 2013 2014 2015 2016 2017

Source: Company Source: Company

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 Normalization of margins. In the absence of positive adjustments to employee
benefits, GMFI’s margins normalized with EBITDA and net margins declining to
18.2% and 11.6% in 2017 from 24.3% and 14.9% in 2016, respectively. The
margin were still higher than they were in 2014. Staff expenses became the
largest component in the company’s cost structure. In 2017, staff expenses were
32.0% of the operating expenses.

Exhibit 35. Margin normalized Exhibit 36. Cost structures (2017)

Operating margin EBITDA margin

30.0% Other
D&A 16%
25.0%
4% Staff exp.
20.0% 32%
15.0%
Subcontr
10.0%
act
26% Material
5.0%
exp.
0.0% 22%
2011 2012 2013 2014 2015 2016 2017

Source: Company Source: Company

Solid balance sheet. Net gearing declined sharply to 5.5% in 2017 from 44.9%
in 2016. This was mainly due to: a) the USD84.2mn of funds raised from the IPO
which were reflected in the 38.3% yoy increase in cash and 77.2% yoy increase
in equity and b) the 27.1% yoy lower total debt. With the company planning to
spend a large amount of capex of around USD158mn in 2018 to achieve organic
and inorganic growth, we expect higher gearing of 10.3% in 2018.

Exhibit 37. Solid balance sheet after raising funds through IPO
USD mn %
350 50
300
40
250
200 30

150 20
100
10
50
0 0
2011 2012 2013 2014 2015 2016 2017
Cash (LHS) Debt (LHS) Equity (LHS) Net Gearing (RHS)

Source: Company

Receivable days remained at a high level. GMFI’s trade and gross receivable
days remained at a high level of around 149 days in 2017 (2016: 128 days) due
to rising total receivables from third parties. While total receivables from Garuda
group (Garuda Indonesia and Citilink) declined slightly, the number of receivable
days increased to 129 days in 2017 (2016: 118 days). Nonetheless, the company
managed to book positive operating cash flow of USD16.8mn in 2017 vs.
negative operating cash flow of USD16.3mn in 2016.

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 KEY RISKS

Delays in improving capability and capacity in aircraft maintenance. Any

inability to improve its capability and capacity in aircraft maintenance would
negatively affect the company’s potential to seize domestic market share or
global market share. In turn, this would result in lower revenues potential.

Delays in customer payments. With the company’s operations requiring

extensive working capital for the procurement of materials and components,
any late payments from customers might negatively affect the company’s
working capital cycle as well as its profitability. This would further impact the
company’s operating cash flows and delay further expansion due to limited
capital expenditure over the short-term. Also, since 63% of the company’s
revenues still rely on GIAA, GMFI’s profitability is also directly related to the
financial performance of GIAA. Any late payments from GIAA would impact the
cash flow of GMFI.

Operational Risks are any delay in the completion of aircraft maintenance due
to a lack of human resources, unavailability of the tools and inability to secure
aircraft materials and spare parts.
 Lack of competent human resources. The MRO business depends
heavily on the availability of competent human resources. Employees
may need to have several certifications which are required by the
authorities to conduct aircraft maintenance. Delays in human resources
development might mean that planned development targets are not
met. This would have an adverse impact on the company’s financial
performance.
 Unavailability and or non-functioning of the tools and equipment. Any
unavailability of the tools and equipment for aircraft maintenance might
require the company to outsource work immediately, which would be
more expensive. Also, damaged machines need to be repaired, which
takes time and money.
 Inconsistency to secure aircraft materials and spare parts on-time. For
a smooth aircraft maintenance process, materials and components must
be available. Any inability to secure aircraft materials and spare parts
would result in delays in the completion of aircraft maintenance. Also,
buying materials and components with Aircraft on Ground (AOG) status
would be much more expensive than normal and require time for the
materials to be shipped. This would result in lower profitability as the
company would need to purchase materials and components at higher
prices while customers might impose penalties due to completion
delays.

Changes in policy and regulation. The aircraft MRO business is heavily regulated
by the authorities. Any changes in regulations and or policy would negatively
impact the company’s operational activities since the company can receive
sanctions if it does not follow new policies immediately.

Foreign currency risks. While the company’s financial statements are in US

dollars, any change in the US dollar/rupiah exchange rate might give rise to
exchange rate losses which would negatively impact the company’s bottom line.
About 80% of the company’s revenues are in rupiah, while 60% of the payments
to suppliers are based on the US dollar. To mitigate this risk, the company plans
to conduct a feasibility study on currency hedging to mitigate the risk of
exchange rate volatility.

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 Exhibit 38. Income Statement
Year to 31 Dec (USDmn) 2016A 2017A 2018F 2019F 2020F
Revenue 389 439 496 580 687
COGS (235) (299) (331) (386) (461)
Gross profit 153 140 165 194 226
EBITDA 94 78 105 125 144
Oper. profit 83 66 87 97 108
Interest income 0 0 1 1 1
Interest expense (7) (9) (7) (7) (7)
Forex Gain/(Loss) (4) (1) 0 0 0
Income From Assoc. Co’s 0 0 0 0 0
Other Income (Expenses) 0 10 0 0 0
Pre-tax profit 73 68 81 91 102
Income tax (19) (17) (20) (23) (25)
Minority interest 0 0 0 0 0
Net profit 53 51 61 68 76
Core Net Profit 58 51 61 68 76

Exhibit 39. Balance Sheet

Year to 31 Dec (USDmn) 2016A 2017A 2018F 2019F 2020F
Cash & cash equivalent 60 84 106 118 154
Receivables 151 185 166 200 216
Inventory 84 107 112 131 152
Other Curr. Asset 31 27 26 28 36
Fixed assets - Net 105 123 263 292 332
Other non-curr.asset 9 8 12 14 16
Total asset 443 534 685 783 906

ST Debt 51 43 51 51 51
Payables 76 75 76 96 121
Other Curr. Liabilities 20 18 40 45 48
Long Term Debt 87 58 87 87 87
Other LT. Liabilities 36 40 63 70 88
Total Liabilities 270 233 318 349 395
Shareholder'sFunds 173 306 366 434 511
Minority interests 0 0 0 0 0
Total Equity & Liabilities 443 539 685 783 906

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 Exhibit 40. Cash Flow
Year to 31 Dec (USDmn) 2016A 2017A 2018F 2019F 2020F
Net income 53 51 61 68 76
Depreciation and Amort. 9 12 18 28 36
Change in Working Capital (69) (55) 39 (32) (16)
OtherOper. Cash Flow (6) 8 31 11 22
Operating Cash Flow (12) 16 148 75 118

Capex (27) (30) (158) (57) (75)

Others Inv. Cash Flow 0 0 1 1 1
Investing Cash Flow (27) (30) (157) (56) (74)

Net change in debt 0 83 0 0 0

New Capital 76 (37) 38 0 0
Dividend payment 0 0 10 12 14
Other Fin. Cash Flow (7) (9) (17) (19) (21)
Financing Cash Flow 69 37 31 (7) (7)

Net Change in Cash 31 23 22 12 37

Cash - begin of the year 25 60 84 106 118
Cash - end of the year 60 84 106 118 154

Exhibit 41. Key Ratios

Year to 31 Dec 2016A 2017A 2018F 2019F 2020F
Growth (%)
Sales 27.2 13.0 12.9 17.1 18.3
EBITDA 58.8 (17.1) 34.7 18.1 15.2
Operating profit 64.2 (20.3) 31.6 11.2 11.2
Net profit 27.4 (4.7) 18.9 12.3 12.1
Profitability (%)
Gross margin 39.5 32.0 33.3 33.5 32.9
EBITDA margin 24.3 17.8 21.3 21.5 20.9
Operating margin 21.4 15.1 17.6 16.7 15.7
Net margin 13.8 11.6 12.2 11.7 11.1
ROAA 14.2 10.4 9.9 9.3 9.0
ROAE 36.2 21.3 18.0 17.0 16.1
Leverage
Net Gearing (x) 0.4 0.1 0.1 0.0 0.0
Interest Coverage (x) 12.7 7.6 12.3 13.6 15.2

Source : GMFI, Danareksa Estimates

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