The company is selling 22% of its share capital or 937.3 million shares. About 70% of the deal will be offered to international investors, while the remaining 30% will be set aside for domestic accounts. The actual bookbuilding is expected to start on May 5, with the pricing scheduled for May 20 and the trading debut for June 11. This drawn-out process is normal on Indonesian IPOs, but will undoubtedly add to the pricing risk given the current equity market volatility.
Citi and Deutsche Bank are joint global coordinators for the deal and bookrunners for the international portion, while Danareksa Sekuritas, Indopremier Securities and Mandiri Sekuritas will arrange the domestic sale.
Aside from being on the right side of the supply/demand imbalance of coal, which stems from logistic bottlenecks in Australia and South Africa, heavy imports by India and China and growing demand from IndonesiaÆs power generators, Indika also has other assets and an improving corporate strategy that syndicate analysts argue adds to its attraction.
ôGreater parent-level strength combined with a strong (and strengthening) balance sheet means Indika is well-positioned to pursue further energy investments in Indonesia, and develop into its stated aim of becoming an integrated energy play,ö one syndicate research report notes.
Established as an investment vehicle in 2000, Indika has grown significantly through mergers and acquisitions over the past three years and currently also owns 100% of the Tripatra group, which is an engineering, procurement and construction business focusing on the oil & gas industry. Tripatra has annual revenues of $300 million at present and a backlog of engineering and construction orders totalling $376 million. According to the research report, it is also a short-listed bidder for contracts valued at a combined $4.4 billion of which it can be expected to win at least a few. Together with a stable operating margin of 10%, TripatraÆs operating income is projected to increase to about Rp320 billion ($35 million) in 2009 from Rp195.6 billion in 2007.
However, despite it having only a minority stake, the Kideco Jaya Agung mine is still by far its biggest income earner and is expected to account for about 76% of pre-tax and pre-financing returns in 2009, compared with 17% for Tripatra. IndikaÆs third major business is a 20% stake in the 660MW Cirebon power plant. The coal-fired plant is however still under construction and isnÆt expected to contribute to earnings until it is finished in 2011.
It is therefore no surprise that early feedback from investors suggests that they will primarily view the listing candidate as a coal mining company and will compare it to the other two major listed Indonesian coal miners û Bumi Resources and TB Bukit Asam. These two currently trade at a 2009 price-to-earnings valuation of 10.4 and 10.8 times respectively. Investors will likely demand a discount to these two, and the size of that discount will depend to a large extent on their views on coal prices and IndikaÆs future production volumes. One of the syndicate research reports uses a 2009 P/E multiple of 10.5 times for Kideco when calculating the fair value for the entire group, which is close to the sector median.
The report estimates IndikaÆs fair value at between $1.3 billion and $1.5 billion after deducting a conglomerate discount of 15%-30% from the estimated net asset value. Based on the same bankÆs forecast of a sharp earnings growth at the group level of 265% in 2008 and 65% in 2009 (it grew 49% last year), this gives a 2009 P/E range of 7.3 to 8.9 times for Indika. The eventual valuation will likely depend not only on the outlook for the company though, but just as much on the market conditions at the time the price range is decided (i.e. just before the international roadshow starts almost three weeks from now).
Investors say they prefer to look at valuations for 2009, partly because this is when increased production and high coal prices are expected to have a full impact on IndikaÆs earnings. Kideco has missed a large part of the price increases in the past six months since it signed contracts for 90% of its 2008 production volume at a price of $45 per tonne during the second half of 2007. The benchmark price of thermal coal averaged about $55/tonne in 2007 and is expected to increase to $96 this year before reversing course and edging towards $87.50/tonne in 2009.
Meanwhile, sales volumes from the Kideco mine is expected to increase at a compound annual growth rate of 8% over the next three years from 20.5 million tonnes last year. In the 1993-2007 period coal production grew at a CAGR of 21%. Sources say the majority of the IPO proceeds will go towards capital expenditures related to expansion, although a portion will be set aside for working capital. The company will get its hands on more of the net proceeds since close to 89% of the offering is made up of new shares.
According to a statement by Fitch Ratings published yesterday, more than half of the proceeds will be used to acquire, explore and develop coal assets in Indonesia, while the balance is earmarked for investments in energy and infrastructure projects and for working capital. The ratings agency says IndikaÆs total budgeted capex for the next five years is estimated at around $580 million, and notes that the company still has about $100 million left in cash from the $250 million high-yield bond that it issued in April. And at the end of last year, the company had an additional $92.7 million in cash and cash equivalents on its books.
ôA successful implementation of its (acquisition and investment) plans, which are complementary to IndikaÆs existing businesses, could result in greater synergies across the companyÆs major business activities,ö it said. But there is also ôsome uncertainty about the size and quality of the incremental future cash flows arising from these new investments and acquisitions, given that the specific targets have not been finalised,ö it added.
Indonesia has performed no worse than some of the major regional markets so far this year û it is currently down 14.8% compared with a 14.1% decline in both Hong Kong and Tokyo û but it hasnÆt exactly been a favourite with international investors either amid concerns that rising inflation will curb consumer spending and corporate earnings growth. However, observers point out that Indika is relatively isolated from this.
ôYou are not buying a domestic consumption play. This is a global commodities business with exposure to coal,ö one source says. ôIt is an entirely different business.ö
Investors seem to agree at least to some extent since Bumi has outperformed the broader market so far this year with a rise of 4.2% (although it has been quite volatile). Bukti Asam is, however, down 16%.
Also supporting this argument is the fact that KidecoÆs two largest customers are Korea Electric Power Corp (Kepco) and Taiwan Power, which together account for 30% of total sales. Aside from four Indonesian power producers, the companyÆs top l0 customers also include power companies from Hong Kong, Malaysia, India and Thailand.
Among the key risks for investors to consider û aside from the future direction of coal prices û is the fact that Indika doesnÆt have operational control over its main asset û the Kideco mine, which is 49% owned by Korean energy company Samtan. While the two main owners have worked well together so far, there are no guarantees that this will remain the case a few years down the line.