It will also be the second only Philippines company to list this year after Pepsi-Cola Products Philippines which is due to close the international portion of its up to $136 million offering on Friday. The final price will be determined over the coming weekend. According to sources, that deal is going well and is already fully covered.
Coming at a time of jittery equity markets and high fuel prices, Cebu Air is offering its shares at a significant discount to AirAsia. It has also secured a commitment from Temasek Holdings to act as a cornerstone investor, which should help make other investors more confident about the offering. The Singapore investment company, which is also the controlling shareholder of Singapore Airlines, will buy the equivalent of a 5% stake in Cebu Air up to a maximum of $50 million worth of shares through the IPO and has agreed to a 90-day lock-up.
A well-managed, fast-growing and profitable low-cost airline, Cebu Air is an attractive investment proposition, says one source, adding that it has one of the highest utilisation rates and load factors in the world. It also has one of the youngest fleets in Asia, with an average aircraft age of approximately 20 months as at the end of 2007.
According to data provided by the company, the load factor stood at just over 81% in 2007, while its aircraft were used for 13 hours every day û a sharp improvement from 8.2 hours in 2006. It is achieving this partly through short turnaround times, partly by using its aircraft for shorter high-volume domestic flights during the day and then for longer international flights overnight. This makes a lot of sense given that many Philippine airports lack the infrastructure to operate after dark.
By offering a no-frills service, it has also been able to reduce its operating costs per available seat kilometre to Ps2.30 in the first nine months of 2007 from Ps3.03 in 2004.
At the same time the company is in the midst of an aggressive expansion phase with plans to add new aircraft and routes to meet the fast-growing demand from Philippine travellers, which will require a large amount of capital expenditures. However, it should also help underpin growth in Ebitda and net profit.
The company believes that demand will be underpinned by the fact that air travel in the Philippines in still at the very beginning of a period of high growth. According to Euromonitor research, the Philippines air travel market ranked second to last in Southeast Asia in terms of scheduled airline passengers in 2006, carrying only eight of every 100 people. This contrasts sharply with Singapore and Hong Kong, where 432 and 230 scheduled airline passengers were carried per 100 people, respectively.
Having started commercial passenger services in 1996, Cebu Air now operates on 44 routes, of which 28 are domestic and 16 international. It has a fleet of 15 aircraft û most of which it holds through financing leases. Last year it carried a total of 5.5 million passengers (81% on domestic routes), which up until the end of September represented 67% growth over the previous year. According to data compiled by the Civil Aeronautics Board, that makes Cebu Air the leading airline in the Philippines in terms of total passengers carried on domestic routes in the first three quarter of last year.
However, the company is also expanding its international operations and recently started flying to Taipei, Shanghai, Xiamen, Macau and Guangzhou. This year it also plans to add Ho Chi Minh City, Hanoi and Bandar Seri Begawan to its growing international network.
The company has entered into operating lease arrangement for five new Airbus A320-214 aircraft. One of those was delivered in October last year and the company expects to take delivery of the other four this year.
It also plans to acquire up to another 20 new Airbus A320-200 starting from 2010. It has already placed firm orders for 10 of those and has secured options for up to five more. It also has rolling options for a further five. In addition, it plans to buy up to 18 new and smaller ATR 72-500 turboprop aircraft that will allow for more efficient operations out of the smaller airports in the Philippines and will also enable the airline to service smaller markets. It has placed firm orders for 10 of those small planes, which are expected to be delivered from early 2010 to early 2011, and has options for four and rolling options for an additional four.
The UBS-led offering comprises 135.5 million shares, or 33.5% of the company, that are offered to investors at a price between Ps70 and Ps86 apiece. This is slightly below the maximum offering price of Ps95 per share that is referred to in the preliminary listing prospectus and will give a total base deal size of Ps9.48 billion to Ps11.65 billion ($235 million to $288 million). A 15% greenshoe could boost the size to as much as $331 million.
About 53% of the shares on offer are new, while the remaining 47% are existing shares that will be sold by JG Summit, a conglomerate controlled by the Gokongwei family that currently owns 100% of the airline. JG SummitÆs stake will fall to 66.5% after the IPO, or to 61.5% if the greenshoe is also exercised in full.
Seventy percent of the deal will be offered to international investors, while the rest will be sold to domestic institutions and retail investors in a separate offering which will be jointly arranged by First Metro Investment Corp and ING Bank and will take place from January 29 to February 4. The final price will be determined on January 26 after the close of the international offering and the trading debut is scheduled for February 8.
The price range values the company at an enterprise value to Ebitda multiple of 6.9 to 7.9, which compares with an EV/Ebitda multiple of just over 12 for AirAsia. The same range translates into a price-to-earnings ratio of 10.1 to 12.4, although because of the high depreciation and amortisation costs sources say few investors look at the company on that basis.
Ebitda doubled in 2006 to Ps1.66 billion ($36.8 million) and in the first nine months of 2007 had already increased 2.5 times over the year-earlier period to Ps4.16 billion. Net profit increased 10-fold in the nine months to September from a year earlier to Ps2.53 billion.
Among the key risks that could de-rail this strong performance are rising oil prices û fuel costs accounted for 81.3% of total expenses in the nine months to September last year û a long-term debt to equity ratio of four to one, the execution of its aggressive growth strategy and increasing competition in the budget segment of the market, especially on the international routes.
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