While listing candidates in most of the rest of Asia are waiting patiently in the wings for fund managers to return from their summer holidays so that they can start marketing their offerings, bankers have launched investor education for yet another Indonesian initial public offering. The head start is indicative of Indonesia’s growing importance in the equity capital markets (ECM) this year and the attention the country is getting from international investors as the top performing stock market in Asia year to date.
In the first half of the year, Indonesia overtook Singapore as the most active ECM market in Southeast Asia with $3.8 billion worth of deals, according to Dealogic, and accounted for 37% of the total ECM issuance in the region. And earlier this month, Berau Coal Energy raised Rp1.36 trillion ($152 million) from an IPO that was priced at the top of the indicated range and upsized following stronger than expected demand from international investors.
In terms of size, Berau looks set to be overshadowed by the next few Indonesian IPOs, however. Indofood CBP, which started investor education on Tuesday, is aiming to raise at least $500 million, sources say. And state-owned Krakatau Steel and airline Garuda Indonesia, which are both on track to be part-privatised through IPOs in the fourth quarter, could raise as much as $800 million between them, according to various Indonesian media reports.
And the activity isn’t limited to IPOs. Last night, Reuters reported that Bank Mandiri aims to raise Rp13 trillion to Rp14 trillion ($1.4 billion to $1.6 billion) in a rights issue planned for later this year. This is double its previous target and would make it the largest rights issue by an Indonesian state-owned company. The newswire quoted Zulkifli Zaini, Mandiri's president director, as saying that the shares will not be offered at a big discount since demand for Indonesian banking stocks is still high.
Issuers are taking advantage of a favourable market environment that is supported by strong economic growth – fuelled by domestic consumption and commodities exports -- a strengthening currency and the return of investor risk appetite. The Jakarta Composite Index is up 21.2% so far this year and is currently less than 1% below its record close of 3,096 points that it hit on July 29. This makes Indonesia the best performing market in Asia ahead of Thailand and the Philippines. China, Hong Kong, Japan and Australia are all still down on the year.
Indofood CBP (consumer branded products) could be the perfect company to bring to market in this environment, given its focus on domestic consumption. Or as one source put it: “Indonesia is a hot market at the moment and consumer branded products are even hotter.”
And while it may be a bit early to talk about good demand, the source said international investors have at least been very keen on booking meetings for the ongoing investor education.
The listing candidate is a spin-off from already listed Indofood Sukses Makmur, which is the largest noodle maker in Indonesia with a 73% share of the domestic market. It also has a leading market share for packaged foods with 10.3%, which is greater than the number two and three combined.
Indofood CBP comprises production and marketing of the group’s consumer branded items, including noodles, dairy products, food seasonings, snack foods and nutritional products. The unit accounts for 40% of Indofood’s revenues and 60% of the profits, with the rest coming from the company’s other two divisions: distribution, and flour and milling. By spinning off Indofood CBP, the group hopes to be able to realise hidden value and to reduce the conglomerate discount. The parent will also use the IPO proceeds to pay off debt.
In a research report published in late June, J.P. Morgan analyst Stevanus Juanda estimated the conglomerate discount to 20% and said the unlocking of this would add Rp5.7 trillion ($630 million) of value for the parent company.
Looking at it another way, Indofood currently trades at about 14 times forward earnings, while analysts estimate the fair value for Indofood CBP on a standalone basis at around 18 to 20 times forward earnings.
Despite its dominating market share, Indofood CBP is still growing strongly as the consumption of both noodles and dairy products continues to increase alongside Indonesia’s growing population and the strengthening of its economy. According to a source, the consumption of instant noodles is also growing as the population becomes richer on account of its status as a “fast food”. Because of the low price of noodles the company is able to pass on the increasing costs that are the result of rising commodity prices, he said.
Analysts also see huge growth potential for the company’s dairy products as Indonesians currently consume just nine litres of milk per person every year, which compares with 250 litres per person world-wide. The country is also lagging well behind China, where the milk consumption is 20-25 litres per person and year.
Indofood has of course no intention of letting go of such a valuable business and is planning to sell only 20% of Indofood CBP in the IPO. All the shares will be new. Based on analysts’ estimate of a fair value for the entire business of about $3 billion, those 20% would translate into an IPO size of $500 million to $600 million, depending on the IPO discount. At that size, it will be the largest IPO in Indonesia in two years and may even exceed the $528 million raised by coal producer Bayan Resources in July 2008. Mobile operator XL Axiata raised $609 million in March this year in what was widely viewed as a re-IPO, given that the free-float increased from 0.2% to 20%. However, technically that deal was a follow-on offering.
The Indonesian press has earlier reported that Indofood CBP's IPO will be at least Rp4 trillion ($440 million).
Indofood will not sign up any cornerstone investors for the upcoming IPO on account of the fact that it already has a number of large international funds among its own shareholders. Indofood is also 50.5% owned by Hong Kong-listed investment company First Pacific. However, sources say there are likely to be a number of anchor investors.
The formal roadshow is expected to kick off in about two weeks, which would allow the deal to price in mid-September. Credit Suisse, Deutsche Bank and Kim Eng Securities are joint global coordinators and bookrunners.
Photo provided by AFP.