Berau Coal kicks off IPO of up to $133 million

The offering is downsized versus earlier plans after the Indonesian coal producer also raised $750 million from the sale of high-yield bonds and a bank loan.

Berau Coal Energy, the fifth largest coal producer in Indonesia, will kick off an international roadshow for its initial public offering this week after starting to take orders from domestic investors on Wednesday last week.

The company is aiming to raise between Rp900 billion and Rp1.2 trillion ($100 million and $133 million), which is significantly smaller than the $300 million talked about earlier. The reduction comes after the company has raised more money than planned through the sale of high-yield bonds and a bank loan over the past month, but the deal has also been sized to correspond with the level of "real" demand, particularly from Indonesia, that the bookrunners feel exists based on feedback from the pre-marketing process.

According to sources, there has been good demand from domestic institutions since the launch last week, while international interest is more questionable, given the drop in commodity prices in recent months amid lingering concerns about growth in China. As a major consumer and importer of various resources, including coal, a slowdown in the Chinese economy would have spill-over effects globally. There are also already a number of listed Indonesian coal producers to choose from, and as Berau is being offered at a valuation that is largely in line with its main competitors, the company will have to convince investors that this is justified. And they will have to do it during a period when many international fund managers are taking their summer holidays.

People involved in the deal are confident that it can get done based on domestic buying alone, said one source. "Any international demand will be the cream on the cake."

That said, Indonesia is the best performer among the major stock markets in Asia this year, ahead of the Philippines and Thailand. Supported by a strong domestic economy, the Jakarta Composite Index has risen 19% so far this year -- it closed at a record high on Friday -- which compares with a 5% drop in Hong Kong's Hang Seng Index and a modest 2% rise in the Singapore's Strait Times Index. Shanghai is trailing with a 22% decline. This could help attract some interest from international players.

The company is planning to prioritise Asia during the international roadshow, i.e. Hong Kong and Singapore, but may also visit London and New York with the idea of capturing some of the specialist mining funds that reside there. The domestic bookbuilding will end on July 29, while international investors can continue to submit orders until August 3, when the final price will be determined. The trading debut is scheduled for August 19.

Having initially planned to sell 7 billion new shares in the IPO, as per an earlier stock exchange filing, Berau is now offering just 3 billion shares, or about 10% of its enlarged share capital. The price has been set at Rp300 to Rp400 per share, which equals about 9 to 11 times the company's projected earnings for 2011, based on forecasts by the international bookrunners.

Among the other Indonesian coal producers, Adaro Energy is trading at a 2011 price-to-earnings ratio of about 11.3 times, Indika Energy is at 9.3 times and Indo Tambangraya Megah, which is the most similar in size when it comes to production levels and reserves, is currently quoted at 9.9 times, all according to Bloomberg. Industry leader Bumi Resources is trading at 7.1 times, as the stock is partly suffering due to uncertainties related to its main owner, the Bakrie family.

Berau is currently majority owned by Indonesia-based investment firm Recapital Advisers, which bought a 90% stake late last year from Indonesian individual Rizal Risjat and Dutch firm dan Rognar Holding. The remaining 10% is in the hands of Sojitz Corp, a listed Japanese trading and investment company.

Among the key attractions for investors are Berau's efficiently-run operations and plans for a capacity ramp-up over the next few years. At the end of May, a Berau official, commissioner Bob Kamandanu, was quoted by Bloomberg saying that the company may increase its output to 30 million tonnes in 2014 from about 15 million tonnes in 2009 and expects to produce about 17 million tonnes this year. These projections are partly based on optimism about rising demand from India, which is in the process of ramping up its electricity production and consumption.  

Like its Indonesian rivals, Berau produces sub-bituminous coal with low ash and relatively low sulphur content, which is ideally suitable for use as a fuel for power utilities. It currently has three mines in operation, while exploration in two other areas is ongoing to determine the size of the coal reserves and the economical potential. Its mining assets are all located in East Kalimantan in Indonesia.

Also, this may be the last of Indonesia's major coal companies to go public, making it something of a last chance for investors not yet involved who are looking for exposure to the sector.

The company was marketing an initial public offering in August 2008, but the listing was called off when risk appetite among investors deteriorated rapidly as the financial crisis gathered pace. It needs fresh capital to pay for the expansion of its production capacity.

Earlier this month, Berau raised $350 million from the sale of 12% five-year bonds, which helped to re-open the Asian high-yield markets. The deal, which was arranged by Credit Suisse and Deutsche Bank, was two times covered with orders from about 100 accounts. According to sources and media reports, the company has also recently secured a $400 million bank loan from a number of foreign banks, including Credit Suisse, Deutsche and at least one Chinese bank.

Credit Suisse is involved in the IPO as well, acting as joint bookrunner together with Danatama Makmur and J.P. Morgan. Recapital Securities is also involved in a junior role.

¬ Haymarket Media Limited. All rights reserved.
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