PT Kino launches rare Indonesian IPO

Consumer goods company launches only the second $100 million-plus initial public offering of the year from Indonesia.
Will this IPO have a fairy tale ending?
Will this IPO have a fairy tale ending?

PT Kino, an Indonesian consumer goods company, has launched a Rp1.07 trillion to Rp1.493 trillion ($79 million to $110 million) initial public offering that marks only the second $100 million-plus deal of the year from the country.

Issuance has been extremely sparse given the Fed-related headwinds facing the country, which have made its stock market and currency one of the worst performing in the region during 2015. 

The Jakarta Composite Index (JCI) remains down 9.78% on the year despite October's 13.85% rally and the rupiah is 9.78% weaker against the dollar year-to-date, although it also rebounded sharply in October and has retraced 7.43% of its losses since its late September lows.

These macro concerns will be uppermost in investors minds as they ponder the undeniable attractions of a fast growing consumer goods company against the risk that Indonesia might falter if the market starts to factor in a higher probability of US rate rises in December and emerging market investors head for the door once more.

"The key question is whether US rate rises are already priced into the Indonesian equity market and currency," a banker told FinanceAsia. "The Rupiah slid quite considerably the last two times rate rises looked likely and didn't really re-gain much ground when they faded away again, so it's possible they have."

In a recent strategy report, Credit Suisse suggested that even though foreigners are still net sellers, there is a sense that bottom fishers are looking for good entry points back into the market again. However, it cautions that, notwithstanding the JCI's sharp drop this year, Indonesia remains one the four most expensive Asian markets in terms of price to book relative to return on equity.

Analysts also downgraded Indonesian earnings per share estimates by 1% during the third quarter, a larger cut than in other mainstream Asian markets, according to Credit Suisse. Where the consumer goods sector is concerned, the bank says aggregate revenues for the 12 companies it covers (12.7% of the JCI) are down 5% quarter-on-quarter as consumer spending remains weak. 

Deal terms and valuation

If PT Kino can overcome these concerns, its IPO should do well as it is the kind of company investors normally love: a pure play consumer goods manufacturer and distributor that has enjoyed consistently high growth as it rides the expansion of Indonesia's middle class. 

It is still much smaller than bigger operators such as Unilever and Mayora Indah, but syndicate analysts say it has the advantage of owning most of its own brands and not having to pay royalty fees to a parent, as well as a reputation for innovation. 

The IPO is being pitched on a consensus 2016 p/e multiple of 15 to 21 times. Bankers say the deal is attracting good interest although price tension is coming through at the lower half of the range given the unsettled market backdrop. 

The wider Indonesian consumer goods sector spans a p/e range of 14 to 41 times 2016 earnings. However, this range is distorted by Unilever, which trades at 41 times 2016 earnings and has outperformed the JCI, up 8.9% year-to-date. 

Excluding Unilever, the sector average stands at about 21 times, exactly where biscuit and sweet manufacturer Mayora Indah trades. It is up 6.4% year-to-date.

PT Kino is offering 285.714 million shares on a price range of Rp3,750 to Rp5,225. The deal has a split of 80% primary shares and 20% secondary shares, with the vendor PT Kino Investindo subject to a one-year lock-up. 

In total the company is offering 20% of its enlarged share capital, equating to a market capitalisation of $394 million to $550 million. 

Roadshows will continue through to November 20, with pricing scheduled for November 23 and a retail offering from December 2 to 4. Listing is expected on December 9.

Smaller but growing faster

PT Kino's prospective market capitalisation is also a minnow compared to Unilever Indonesia, which has a roughly $20 billion market cap, with Mayora Indah on $1.7 billion. According to Deutsche Bank research, the company distributes its products to 201,076 outlets across Indonesia's 35 provinces compared to Unilever's 600,000 outlets and Mayor Indah's 325,000.

By 2020 it is targeting 1.4 million. 

The German bank forecasts a compound annual growth rate (CAGR) of 17% for revenues between 2015 and 2017 and 25% for net income. 

It says the company's main selling points are its brand portfolio and leadership in underpenetrated sectors, combined with its national distribution network and reputation for product innovation. 

In 2014, 50% of the company's revenues and 65% of its gross profit came from personal care products, a sector where Deutsche Bank points out that Indonesians spend only $26 per capita compared to Malaysia's $104. 

PT Kino has a leading 77% market share in hair vitamins through its Ellips brand; a leading 67% share in intimate hygiene products via its Resik-V and Absolute brands and also holds the number one spot in splash cologne through its Eskulin brand. 

The company's main strategy lies in finding sectors that have high growth potential and then providing high quality innovative products at affordable prices. 

Risk factors include an estimated Rp840 billion in capex in 2015, which is a limiting factor on free cash flow and means the company will not pay a dividend. About 80% of its raw materials are also dollar-linked and Deutsche estimates that any 10% depreciation in the rupiah will cut profits by 28%, although a 2% price hike could offset this. 

The company highlights its R&D expertise and its fast 18-month turnround from product idea to commercialisation. In 2014, R&D amounted to 0.5% of sales. 

Its first-half Ebit margin of 13% is in line with the sector average. Unilever is forecast to turn in a 21% Ebit margin and Mayor Indah 8.6% during 2015. However, PT Kino's 3% net margin in 2014 is low, although bankers say this should rise over the coming few years as interest expenses declines. 

Mayora Indah similarly reported a 3% net margin in 2014, while Unilever came in at 17%, underlining why it has such a lofty valuation.

Joint global co-ordinators for the IPO are Credit Suisse and Deutsche Bank with PT Indo Premier Securities on the domestic books. 

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