HAS Garuda, Indonesia’s state-owned national airline, missed the boat? Last year, it seemed that nothing could go wrong for companies wishing to list on the stock market. Indonesia’s benchmark share index jumped 46 per cent, supported in part by US$2.2 billion (S$2.8 billion) in foreign portfolio inflows, more than double the level registered in 2009.
Most initial public offerings (IPOs) were many times oversubscribed. Not surprisingly, local market entrants gained more than 20 per cent on the first trading day. The shares of state-owned Krakatau Steel, for example, rose nearly 50 per cent after its debut.
Garuda’s long-delayed IPO is scheduled for Feb 11. Problem is, prices on the Jakarta stock exchange have dropped by almost 10 per cent so far this month. If they continue to fall, the market euphoria that buoyed IPOs last year may not be sufficient to ensure success. Instead, companies that want to issue IPOs will have to convince investors of the wisdom of investing in them based solely on their inherent value.
Initially, Garuda had hoped to raise up to US$1.1 billion by selling 36.5 per cent of its shares. This week, those figures were scaled back dramatically. On Wednesday, the government announced that it would put only 26 per cent of the airline up for sale. It would also sell the shares at a reduced price. The offering is now valued at around US$540 million.
The pricing of shares offered by state enterprises has become a sensitive topic, following a controversy over the low price of steel giant Krakatau Steel’s shares during its IPO last year. It is now clear that, in responding to this criticism, Garuda went to the opposite extreme.
One commentator recently noted that while most listed regional airlines have price-earnings ratios of around 10 to 13, Garuda’s initial proposed IPO price range of 750 rupiah (10.7 Singapore cents) to 1,100 rupiah implied a price-earnings ratio of between 16.4 and 24 times last year’s earnings. Wednesday’s announcement priced it at 750 rupiah. Even at the lower end of the range, however, Garuda still looks a bit expensive.
Garuda spokesmen nevertheless believe they have a good story to tell. Unprofitable up to 2006, the airline reported a net income of 152 billion rupiah in 2007. The company even managed to chalk up 1.018 trillion rupiah in profits in 2009, despite a fall in revenues caused by the global financial crisis.
Through a combination of repayments and equity conversion, Garuda has also reduced its debt burden. From a crippling US$868 million in 2005, its total debt in November last year stood at just US$464 million. Last month, the company also announced a renegotiated US$277 million debt agreement with the European Export Credit Agency.
Banned by the European Union (EU) in July 2007 because of its poor safety record, Garuda has undergone a major internal reorganisation, including putting a greater emphasis on service standards. Reflecting the success of these reforms, the EU ban was lifted in July 2009. And last year, London-based research company Skytrax named Garuda the “World’s Most Improved Airline”.
But will all these – together with the reduced price – be enough to convince investors? Two market debutantes that launched their IPOs amid last year’s euphoria were unceremoniously brought down to earth on their first day of trading earlier this month. The shares of real estate developer Megapolitan Developments dropped 16 per cent, while those of cosmetic giant Martina Berto slipped 11 per cent. The underperformance is particularly striking, given the fact that the shares were heavily oversubscribed – Megapolitan’s by 14 times and Martina Berto’s by 11 times.
Prospective investors in Garuda may also be spooked by last year’s confusion over profit figures. In November, just days after the government said Garuda had lost 39.5 billion rupiah in the first nine months of the year, the airline surprised investors by announcing instead a profit of 194 billion rupiah. The difference was attributed to an auditing anomaly.
Much of Garuda’s pitch to prospective investors focuses on the projected growth in Indonesia’s domestic airline industry. According to the Centre for Asia Pacific Aviation (Capa), the number of domestic passengers in Indonesia will grow by 60 per cent by 2015. Garuda says the IPO will give it the cash it needs to expand its fleet to take advantage of this growth. The airline also aims to add more international routes, as increasingly prosperous Indonesians travel abroad in larger numbers.
Potential investors, however, will be mindful of the fact that the benefits of the market expansion will be shared among several airlines. Singapore and its regional arm SilkAir hold 12 per cent of Indonesia’s international market by capacity, according to Capa. That is close to the 15 per cent held by Garuda.
The Indonesian government initially planned to launch the Garuda IPO in November last year, but delayed it to this year, presumably in order to allow state- owned Krakatau Steel first bite of the cherry. It is a move all concerned may now live to regret.
Copyright © 2011 Singapore Press Holdings Ltd