Feb 1, 2011

Underwriters struggle for Garuda IPO

One of lead underwriters for Garuda IPO is still struggling to meet its underwriting quota. Garuda IPO lead underwriters are Bahana Securities, Danareksa Sekuritas, and Mandiri Sekuritas. They are all affiliated local houses with Ministry of State-Owned Enterprises (SOEs).
The lead underwriters are now gathering about 50 syndicated underwriters with about total underwriting of IDR1 trillion. But, the size is still moving,
"With the IPO size of Rp4.7 trillion, syndicated underwriters would underwrite about Rp1 trillion and the remaining of Rp3.7 trillion will be fully underwritten by the lead underwriters," the source said.
With the bulk of underwriting, each lead underwriter has fully committed to underwrite Rp1.23 trillion of Garuda primary shares.
"There is one lead underwriter which is currently struggling to meet its quota. It has sold less than Rp500 billion. But, the commitment burdens them. The unsold stocks of Rp730 billion may be shared among lead underwriters," the source said.
Bahana Securities President Director Eko Yuliantoro said Bahana is still trying to sell Garuda, following the target.
"Somehow, we keep trying to sell Garuda. We can't comment on the market demand," he said.
Marciano Herman, President Director of Danareksa Sekuritas, is unreachable for comment.
According to the source, it is still possible for the lead underwriters if SOEs Minister Mustafa Abubakar urges them to stick with their commitment. They can use external financing to absorb Garuda shares in the primary market.
"Under current circumstances, I want to know which bank is available to help the lead underwriters," said an investment banker at a foreign house.
Regarding to the capital paid in, Bahana, Danareksa, and Mandiri Sekuritas record Rp1.15 trillion, far below their commitment to underwrite Garuda shares of Rp3.7 trillion.
Core problem
The core problem for the underwriting commitment will not end when they can absorb unsold shares. "The main problem for the lead underwriters begins when Garuda stocks plunge far below the IPO price of Rp750 per share," the source said.
With each lead underwriter still keeps Garuda stocks in its book, they will potentially suffer in red. Initially, the lead underwriters proposed the IPO price at Rp560 per share to Mustafa Abubakar. "If Garuda falls to Rp560 per share during its trading debut, the lead underwriters may suffer Rp190 per share of capital loss. Don't be shock if you see Bahana, Danareksa, and Mandiri Sekuritas's bottom line are in red."
As quoted by Finance Asia, quoting a source, said it is only about 10 international investors participated in the deal and market talk suggested that as much as 80% of the offering will be allocated to domestic Indonesian accounts.
The price was fixed at the bottom of the Rp750 to Rp1,100 indicated range and at the same time, the company also decided to sell only 4.4 billion new shares, compared with an earlier plan to sell up to 7.4 billion.
However, a source said it had always been the intention of the company to raise about US$350 million of fresh capital and that target will be achieved.
The final price of Rp750 per share values Garuda at an enterprise value-to-Ebitdar multiple of 6.9 times, which is at a slight premium to the average multiple of 6.8 times among its primary peer group, which includes well-established country flagship airlines like Air China, Singapore Airlines, Thai Airways and Malaysian Airlines, as well as newer low-cost carriers like AirAsia, Tiger Airways and Jet Airways.
Ebitdar refers to Ebitda adjusted to take into account the cost of leased aircraft. The average valuation is generally pushed up by the LCCs. Garuda runs a traditional full-service airline, but also has an LCC operation to cater to the growing number of low- and middle-income travellers who are increasingly using air travel as an alternative to buses and ferries.
The aggressive pricing was believed to have been driven by the government, who didn’t want a repeat of the Krakatau Steel IPO a few months ago.
The steel producer rallied sharply after the trading debut, leading to accusations that the government had sold of its assets too cheaply. Citi and UBS were joint international bookrunners for the Garuda IPO.

Disclosure: No position at the stock mentioned above.

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