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Garuda IPO Failing to Soar

Garuda's Future Plans May be Stymied by IPO that will Fall Short by 50% of US$540 Million Cash Goal.

(1/31/2011) After a world-roaming road show to promote the initial public offering for Garuda Indonesia, potential investors are appearing less than enthusiastic, failing to fulfill expectations they would snap up public shares on offer for the debt-ridden national carrier.

Based on projected profits of Rp. 1.2 trillion (US$133 million) for 2010, Garuda's price ratio (PER) equates to 16.04 times, a PER ratio substantially higher than industry competitors Singapore Airlines (13.91), AirAsia (9.48), Malaysian Airlines (7.07) and Cathay Pacific (7.6). Impressions that Garuda's shares may be over-priced are enforced by Tempo Interactive who highlight the 2009 financial reports of Garuda where the price ratio to net profit was 19 times, 6 times the book value of the airlines and 7.4 times net profit.

At the initial price sought by Garuda, the airline's sales price would make the Indonesian national carrier more expensive than 48 of the world's top 50 airlines when measured in terms of market capitalization.

According to Reuters, lower-than-expected prices for the Garuda IPO may end up raising only US$526 million, a figure almost 50% less than the initially targeted US$1.1 billion.

According to FT.com, Garuda's public stock offering is being made at a time when airline stocks are generally seen to weigh down any portfolio's value. Half of the world's airlines have failed to book a profit in the past year, and that is in a year when airlines were seen to be on the financial mend. The Standard and Poor's tracking of the aviation sector since 1990 has demonstrated a gain of 5%, a figure under performing the S&P by 93 times during the same period.

Due to the lack of strong market interests in the Garuda IPO, a report by Bisnis Indonesia says that 57% of the Rp.2.74 trillion will have to be taken up by the IPO's underwriters: PT Mandiri Securities, PT Bahana Securities and PT Danareksa Sekurities.

The head of research for PT Bhakti Securities, Edwin Sebayang, told the press: "It's surprising and beyond our expectations that the requests for Garuda stocks is only 1.3 times the available shares, making it understandable that 57% of requests during the 'book building phase' are being taken up by underwriters. This is the first time for such a large amount of shares are given to the underwriters."

Edwin also confirmed that the share price of Rp. 750 (US$0.083) is still high when compared with the share price of competing airlines in the region. Looking closer to home, Edwin said Garuda still loses out to domestic competitors, such as Lion Air, in terms of ability to dominate the domestic air market.

Edwin also said that his research showed that the low price to be earned by Garuda via the IPO is likely to complicate efforts to expand the armada of the airline. "Indeed a part of the funds from the IPO will be used for buying aircraft. However, a portion of the funds obtained from the IPO, around 24% or Rp. 1.42 trillion, will be set aside to pay off debts owed to Bank Mandiri.

According to Bisnis Indonesia, rumors are also circulating in the marketplace that some of the companies that ordered share lots in the IPO are now seeking to revoke their orders, a rumor denied by an official of PT BNI Securities.