Garuda to spin off aircraft maintenance unit

Indonesia’s flag carrier is spinning off its maintenance unit in what promises to be the country’s largest IPO this year.

A fledgling equity sub-sector of the Asian aviation industry is on the verge of a growth spurt after Garuda Maintenance Facility AeroAsia launched an Indonesia initial public offering of Rp3.2 trillion ($245 million) on Tuesday.

The aircraft maintenance services subsidiary of flag carrier Garuda Indonesia intends to float 20% of its share capital in what could be the country's largest IPO since construction materials supplier Waskita Beton Precas was floated in September 2016 in a $396 million deal.

GMF AeroAsia will be the third pure-play aircraft maintenance company to go public in Asia if it lists successfully on October 10, following in the footsteps of Hong Kong Aircraft Engineering (HAECO) and Singapore’s SIA Engineering.

A number of regional budget carriers and aircraft leasing companies have also listed in the past few years, offering investment opportunities outside of the traditional airlines. So with Garuda's aircraft maintenance now making a beeline for the stock market too, equity investors have a growing choice as the Asian aviation sector becomes more specialised.

However, both HAECO and SIA have not performed well in recent years. HAECO's share price is trading near its lowest level in 10 years, while SIA Engineering shares have also largely been on a downward trend since 2014 and have lost one-third of its market value over the past three years.

Their underperformance reflects the multiple headwinds that the aircraft maintenance industry is facing. In general, the maintenance cycle has been extended because new aircraft and engine models are now more reliable with the advancement of technology, resulting in a longer gap between each check-up. Like cars, planes are becoming more reliable.

At the same time, from an accounting perspective aircraft maintenance companies have to recognise their revenues over longer periods of time because regular check-ups are broken down into multiple phases amid higher safety requirements.

In the face of these challenges GMF AeroAsia has actively expanded its presence outside its domestic market and reduced its reliance on Garuda Indonesia, which contributed to about 65% of its revenue last year.

The company, which only has a 2% share of Asia’s $27 billion aircraft maintenance, repair and overhaul market, has entered into partnerships with GME Aviation Services in the Middle East and with China’s Shanghai Aircraft Customers Service.

Deal terms

GMF AeroAsia is offering 6.35 billion new shares at between Rp390 and Rp510 per share. The IPO features a management and employee stock option plan, through which 624 million shares could be subscribed internally within the next two years. As a result, the company as a whole could be valued by the market at between $938 million and $1.22 billion.

A banking source familiar with the Garuda IPO, which is mainly being targeted at domestic investors, declined to provide an individual share valuation estimate based on the initial price range. Shares in HAECO are currently trading on a historical enterprise value/ebitda ratio of 5.4 while SIA's are trading at 13.7.
 
Concurrent with the IPO, GMF Aero Asia is selling 4.5 billion shares – equivalent to 10% of its enlarged share capital – to five foreign strategic investors. The price for the strategic sale is not disclosed, but it could raise about $93 million to $122 million assuming that the shares are sold at the same price as the IPO.

The company plans to use 60% of the IPO proceeds for capacity expansion, 15% for debt repayment and the remainder for working capital.

Joint bookrunners of the IPO are Mandiri Securities, BNI Securities, Bahana Securities and Danareksa Securities. CIMB is an international placing agent.

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