Garuda IPO Lost Altitude on Poor Planning, Analyst Says

By webadmin on 11:10 pm Feb 11, 2011
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Faisal Maliki Baskoro

Poor timing can have disastrous consequences on and off the ground in aviation, something flag carrier Garuda Indonesia learned the hard way on Friday after its stock dropped 17 percent on its market debut.

Discussions of launching an initial public offering for the airline began 11 years ago, but a series of missteps and poor planning pushed back the stock sale until it eventually landed in the midst of an unfriendly market.

Lin Che Wei, senior capital market analyst and founder of consulting firm Independent Research & Advisory, blamed the State Enterprises Ministry for IPO’s underwhelming results.

“The minister pushed Garuda to list this year amid rising oil prices and inflation. We already saw two IPOs that tumbled on their debut, Martina Berto and Megapolitan Development. The minister could have waited,” Lin told the Jakarta Globe.

“And then there’s the size and price of the shares. It was too expensive and the volume was too big. The underwriters offered a fair price range, but they can’t do anything about it.”

Garuda made its debut on the Indonesia Stock Exchange (IDX) on Friday. It opened at Rp 750 per share, but the price fell as much as 23 percent before eventually settling at Rp 620.

The run-up to the IPO was marked by a delays that saw the offering miss a bull market last year that lifted Indonesian stocks 46 percent.

Lead underwriters Danareksa Sekuritas, Mandiri Sekuritas and Bahana Securities initially set a price range of Rp 560 to Rp 850, but State Enterprises Minister Mustafa Abubakar balked, saying the price should be higher and demanding a revaluation.

“Garuda is our national pride. The price should be higher than that range,” Mustafa said in January. “If you look at it from the initial range, the Rp 750 price tag is really not too expensive.”

Pride won out, but at a price. The IPO was initially projected to yield Rp 7 trillion before being scaled back to Rp 4.75 trillion after interest from foreign investors failed to materialize.

Assuming Garuda hit its forecast 2010 profit of about $127 million, The Wall Street Journal said on its Web site, the price of Rp 750 meant that it was trading at 16.4 times its earnings, expensive by the standards of regional peers such as Singapore Airlines and Malaysian Airlines.

“Investors see an increase in global oil prices impacting Garuda’s profit,” Norico Gaman, head of research at BNI Securities, told Bloomberg. “Garuda can’t increase ticket prices or it won’t be competitive with other airlines. That’s why investors see the fair price for Garuda shares between Rp 500 and Rp 600.”

Jet fuel prices climbed to $118.05 per barrel on Thursday, the highest since September 2008. Fuel accounted for about 32 percent of Garuda’s expenses last year through September.

Misjudging money was nothing new for the airline. The State Enterprises Ministry announced Garuda’s nine-month results in November at a Rp 39.5 billion loss, but it adjusted its findings a few days later to a Rp 194 billion profit, saying it had used unaudited data.

Garuda also had to restructure $288 million in loans with the European Credit Agency in December to put its books in order. It extended the maturities of the loans to 2016, agreeing to repay the ECA in yearly installments of $45 million and $60 million.

President director Emirsyah Satar said on Friday that the payments would come from the airline’s profit and not proceeds from the stock offering.