Gigcapital 5, Inc. (NASDAQ:GIA)

The GeoTeam® is removing Gulfstream International Group (GIA) from the GeoBargain list due to the following reasons:

1.  Investor sentiment regarding the airline industry appears to be increasingly negative.  Although we consider Gulfstream a unique play in the airline industry, investors may not make this observation in the current environment.

2.  Controversy:

• Gulfstream was recently Notified by NYSE Amex of Continued Listing Standards Non-Compliance . The Company currently intends to prepare and submit a plan within the time frame required by the NYSE Amex.
• Since May 7, 2009 Gulfstream has been involved with FAA compliance issues and faces possible civil penalties.  The company has filed a detailed response to the Federal Aviation Administration's findings from a 2008 inspection resulting in a proposed civil penalty. The company provided documentation that aimed to show that it was in compliance with the relevant regulations in substantially all of the findings by the FAA, therefore asserting that  there were no violations in those cases"

'While we may respectfully disagree with the FAA's findings of violations in many cases, we do agree that any error is one too many. Beginning last summer, we immediately instituted daily flight record audits for 100 percent of our flights to prevent any future record-keeping errors,' Hackett said.

Please see the SEC Filing 10Q (For the quarterly period ended: March 31, 2009, page 8),  for more details on this matter.

The GeoTeam® still likes the Gulfstream story, but these aforementioned issues may put a damper on investor enthusiasm.  Whenever possible, we attempt to be involved in stories with limited controversy. Our decision is largely based on uncertainties and not the growth potential of the company.  A major concern is not knowing the amount of the ultimate fine which is currently proposed to be $1,310,000.

We will continue to track Gulfstream, placing the company on the GeoBargain on the Radar List, and offer updates when warranted. It is possible that the second quarter press release will offer more clarification on these short term issues.  We are hopeful that the Gulfstream story will gain traction once all outstanding issues are resolved.  For long-term investors the story may still have legs, as the stock may have limited downside risk at current prices.

The GeoTeam® attended the 2009 Taglich Brothers Annual Small Cap Equity Conference, where Orchids Paper Products and Gulfstream Intl Group Inc presented their growth stories to analysts and potential investors. Both companies gave articulate presentations outlining recent accomplishments and future goals.

Although the GeoTeam® has discussed Gulfstream in prior notes, the company's presentation has shed further light on the growth opportunities that lie ahead for the company arising from recent restructuring moves and industry trends.

Key Points of the Gulfstream presentation:

Several factors are creating market opportunities, while at the same time limiting future competition.

1. Larger carriers are exiting smaller markets where it is not efficient for their large capacity planes.  They are also abandoning domestic markets to focus on international markets.  These abandoned markets are a good fit for Gulfstream's smaller 19 passenger planes.
   
2. Smaller markets are also being abandoned by regional airlines as they continue to gravitate toward larger jet aircraft in the 70-100 seat rangeits  and away from smaller regional jets and turboprop aircraft.   Many of these smaller carriers, known as hub feeders, derive their business from partnerships with larger carriers and tend to follow the larger carriers as they exit smaller hubs.
   
3. Gulfstream is further along the curve than many of its competitors with regards to its restructuring efforts.  Gulfstream has a chance to exploit this situation and purchase assets at reduced prices materializimg from the global economic recession while entering new markets.
   
4. Barriers to entry are even more prevalent today than ever.

The end result for Gulfstream is an opportunity to use its strengths to capture abandoned markets while facing little competition.

What will be the key to driving Gulfstream's shares price?

The airline industry is not necessarily one that investors flock to due to a myriad of uncontrollable factors.  Delving into the Gulfstream story one can surmise that the company is not your typical airline. The company ultimately needs to 1) relay this message to wall street and 2) continue delivering improved financial results, two tasks that the GeoTeam® believes the company is keenly aware of.

GIA Recently reported its 2008 financial results, which showed reduced losses when compared to 2007. However, after stripping away one time non-operating numbers, the company actually reported Positive EBITDA of $589K, a step in the right direction to reporting positive net income.

The company’s initiatives, detailed in the GeoTeam’s original report on February 5, 2009, seem to be bearing fruit as evidenced by company comments in the 2008 year end release:

• "We believe we are now positioned to benefit from lower and more stable jet fuel prices; higher average fares and excess baggage fees; and improved cost efficiency."

•  "The following factors are expected to have a significant impact on Gulfstream's 2009 operating performance, similar to the year-over-year improvement in operating income achieved during the fourth quarter of 2008:"

* After peaking in July 2008, the price of jet fuel declined dramatically during the second half of 2008. The price of jet fuel is now lower than it was a year ago.

* The sale of the fleet of Embraer aircraft will result in lower engine maintenance costs in 2009.

* Lift capacity was reduced (ASMs, or available seat miles) by 35-40% in October 2008 to enable balancing our capacity to reduced demand resulting from a rapidly declining economy.

* Average ticket prices were increased and excess baggage fees were initiated; * Aircraft were redeployed to more profitable routes.

* Substantial structural and capacity-related cost reductions were implemented during 2008.

Another factor that may benefit the company is the changing political climate that may open up travel with Cuba. GIA is one of 5 or 6 company’s that currently service Cuba. As restrictions alleviate,  GIA has an opportunity to be a direct beneficiary to the potential increase in Cuba travel volume. This development may be what had fueled the recent upward move in GIA shares.

Taking all this information in, coupled with the fact that GIA is entering their seasonally strongest months (February to July), may start to grab investor attention.

The GeoTeam® was able to locate analyst estimates (by Taglich Brothers) on GIA and is now able to provide potential valuation scenarios. It is likely safe to assume that the estimates do not include the recent Cuba travel developments and thus may be conservative.

Valuation Scenarios:

Data Inputs: (As of April 19, 2009)

Short Term  Scenarios

The GeoTeam used fairly conservative P/E assumptions.  If the company executes its turn around growth strategy it may be possible to see some multiple expansion, although the airline industry typically has a low P/E.

These scenarios are not intended to be investment advice, but are scenarios based on some commonly used investment guidelines. They are provided to aid investors in making their own investment decisions

The GeoTeam® does not limit its research to just Asia.  We will also be including some commentary on stocks based in the United States.

GIA has piqued the GeoTeam® interest. Normally, the airline industry is not one that the GeoTeam® prefers to invest in, due to its competitive nature and unpredictable energy prices. However, many stocks in this space have been performing well. The GeoTeam® has thus made an attempt to find a stock in this space that has lagged behind others. 

There are several factors that have GIA on our radar:

1.  The decline in energy prices should help profit margins.

2.  The company has resolved outstanding liquidity issues via:

• The sale of certain assets
• The issuance of debentures
• The restructuring of $6 million in creditor obligations

3. The company has been gaining a monopoly as larger competitors have opted to leave some of their markets:

"Our most significant market opportunity relates to the fact that we currently operate in and have targeted future expansion in unserved and underserved short haul markets, which is a growing opportunity for two principal reasons. Many smaller markets are being abandoned by major carriers, as they shift their focus increasingly to international markets and reduce capacity in domestic markets and hubs in response to higher fuel costs and a weakening economy. In addition, many smaller markets are also being abandoned by regional airlines, as they continue to gravitate toward larger jet aircraft in the 70-100 seat range, and away from smaller regional jets and turboprop aircraft." 

Source: SEC Form 10Q (Third Quarter page 12)

4. The company restructured its route network and eliminated city pairs that were no longer profitable in the current high fuel price environment.

Source: SEC Form 10Q (Third Quarter page 13)

5.  The third quarter of 2008 was very much a transition quarter for the Company as we implemented a revised business plan in response to rising fuel prices and a weakening economy. The quarter was primarily characterized by an immediate and substantial reduction in capacity and a corresponding decrease in operating costs. The rate of overall cost reductions during the quarter was not as immediate as our capacity and related revenue reductions, because of the complexities and delays associated with implementing extensive schedule changes and related staff reductions and retraining.

Source: SEC Form 10Q (Third Quarter page 13)

The GeoTeam® still needs to monitor the GIA story to see if the recent developments are bearing fruit.  The company has been losing money for several quarters.  The fourth quarter 2008 ended December and first quarter 2009 ending March, should shed some light into the GIA story and potential various valuation scenarios.