Jan 16, 2011

What do you expect from Garuda IPO?

The state-owned airlines PT Garuda Indonesia (Persero) Tbk is underway to lure both domestic and foreign investors through initial public offering (IPO) road show scheduled on January 13-January 24 2011. The IPO final price is expected to be determined on January 25.      
Iman Rachman, Director of Investment Banking PT Mandiri Sekuritas, one of Garuda IPO underwriters, said the initial price range, at Rp750-Rp1,100 per share, is competitive enough. "The price range represents EV/EBITDA of 7.4-10.8x. The average of EV/EBITDA in the industry is around 7.4x, hence the lowest level is in line with the industry valuation," he said. 
Garuda plans to raise Rp7.02 trillion-Rp10.29 trillion proceed by selling 9.36 billion shares, consisting of 7.43 billion shares of new B series and 1.93 billion shares of old B shares owned by PT Bank Mandiri Tbk (BMRI). Garuda's total shares is 25.66 billion shares.
The airlines announced that the IPO will be offered at the range of Rp750-Rp1,100 per share. PT Bahana Securities, PT Danareksa Sekuritas, and PT Mandiri Sekuritas are the lead underwriter of the IPO, helped by two international arrangers Citi and UBS Securities.
What if Garuda uses P/E?
In a Garuda report published by Mandiri Sekuritas on December 30 2010 titled Flying High, Mandiri Sekuritas estimated Garuda's net profit might reach Rp459 billion, Rp761 billion, and Rp1.02 trillion by end of 2010, 2011, and 2012 respectively.
How about in the last 5 years? 
Garuda Indonesia's net profit was like roller coaster. In 2005, Garuda suffered Rp521.66 billion net loss, but in 2006, it booked Rp710.61 billion net profit. In 2007, the net profit plunged to Rp152.74 billion and made a steep rose to Rp975.05 billion net profit in 2008. In 2009, the net profit slightly increased 4.47% to Rp1.02 trillion. 
The higher bottom line in 2009 was underpinned by extraordinary income of Rp123.50 billion. And, as of September 2010, Garuda booked Rp184.07 billion extraordinary income, this is why the bottom line remained 'green' at Rp194.86 billion. But, at the operational line, Garuda was in operating loss of Rp289.89 billion.    
P/E valuation
In 2011 and 2012, Mandiri Sekuritas estimated Garuda Indonesia might post Rp761 billion and Rp1.01 trillion net profit respectively. 
With a total 25.66 billion shares, earning per share in 2011 and 2012 are estimated to reach Rp29.65 and Rp39.63 respectively. Referring to the price range of Rp750-Rp1,100, estimated P/Es for 2011 and 2012 are 25.29x-37.09x and 18.92x-27.76x. Is it too expensive for the newly IPO?
Mandiri Sekuritas also made forecasts that Garuda's revenue might reach Rp20.02 trillion, the highest level since the last 5 years. In 2011 and 2012, Garuda is expected to post Rp24.02 trillion and Rp27.96 trillion respectively.
Let's check Garuda's operating revenue in the last 5 years. Garuda made the highest growth revenue in 2008. Revenue rose 37.82% to Rp19.35 trillion in 2008 from Rp14.04 trillion. From 2006 to 2007, Garuda made a 11.69% growth and a 7.70% drop from 2008 to 2009.
In Mandiri Sekuritas's forecast, Garuda's revenue increased 12.15% to Rp20.03 trillion, a 19.87% rise to Rp24.01 trillion in 2011 and a 16.45% increase to Rp27.96 trillion in 2012. Will Garuda keep its growth in 3 consecutive years from 2010 to 2012, despite the uptrend price of oil?
Tiny margin
In the last 5 years, Garuda's operating margin was never to reach 8%. It means the airlines has to strive to lower its costs if it wants a higher operating margin. In 2005-2009, Garuda's operating margins were 1.7%, 2%, 5.25%, 7%, and 5.1%. The level of 7% was the highest operating margin.
Net margins in the last 5 years were never to reach 6%. In 2005-2009, Garuda's net margins were -4.1%, 5.7%, 1.1%, 5%, and 5.7%. 
So, with roller coaster bottom line, a tiny margin, and P/E valuation at 25.29x-37.09x and 18.92x-27.76x, what do you expect from Garuda IPO?

Disclosure: No position at the stock mentioned above.

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