Ready to list: Setting sights on 2013 to boots IPOs and market valuation

Central to the exchange’s ambition of doubling market capitalisation by 2015 will be the new supply of shares from initial public offerings (IPO) and secondary rights issues. Recovering from a trough at the start of 2012, the frequency of Indonesian issuances has led the region alongside the Philippines, with a steady stream of smaller issues generating strong demand. Delayed privatisations and a growing pipeline of firms enticed by the prospects of a stronger market rebound in the second half of 2013 will sustain the pace over the coming year. The new market regulator may have to re-examine existing listing incentives to promote larger issues if the market growth targets are to be met.

RECENT ISSUES: The use of listed equities in raising corporate funds has grown significantly, particularly since 2007 when some Rp16.87trn ($1.7bn) in new equity was raised, the first time new share issues raised over Rp8trn ($800m) since the Asian financial crisis. While the market only witnessed new issues in excess of Rp20trn ($2bn) in 2008 (Rp24.39trn, $2.4bn) and 2010 (Rp29.68trn, $2.97bn), the number of newly listed firms has grown consistently since the trough of 2009, when a mere Rp3.85trn ($385m) in new shares were listed. Although the value of new issues dropped to Rp15.48trn ($1.5bn) in 2011, and an additional Rp42.1trn ($4.2bn) in secondary rights issues, the number of first-time issuers grew from 23 to 25, the highest in a decade, reflecting a smaller size of floats. The number of listed firms grew from 420 in 2010 to 462 by December 2012, with IDX’s management hoping to reach 500 by 2015. In the three years to 2012, Indonesia accounted for 1.09% of the value of global IPOs, or 0.29% of its GDP, according to the World Economic Forum.

While the number of listings in 2012 has fallen short of the target of 29 with a goal of raising Rp10trn ($1bn), activity picked up in the second half of the year, with 23 listings by December 2012. One of the largest, that of manufacturer Steel Pipe Industry, came in late 2012 and raised Rp1trn ($100m). Nevertheless, a flurry of smaller issues, primarily of firms benefitting from domestic spending, has continued to come to market. The highest initial rises in share valuations were recorded by property developer Bekasi Fajar, which raised Rp300bn ($30m) by selling 20% of its shares in April; liquefied petroleum gas producer Surya Esa, which raised over Rp150bn ($15m) by selling a 25% stake; stock broker Minna Padi, which sold a 23% stake for Rp118.5bn ($11.8m); and mobile phone distributor Tiphone Mobile, which raised Rp418.5bn ($41.85m), all in January. The firms going public come from a diverse set of sectors, including paper packaging with Alkindo Natarama, food market operator Supra Boga Lestari and two larger phone distributors, Erajaya Swasembada and Global Teleshindo.

SETTING THE PACE: The largest IPO in 2012, however, came in July when pay-TV operator MNC SkyVision sold a 20% stake (the maximum allowed in free floats for broadcast operators) for $228m. The largest issue since coal miner Golden Energy Mines issued $245m in shares in November 2011, the share price grew 40% in the first four months of trading. Bank Jatim, the second regional development bank to list, followed suit that the same month with a Rp1.28trn ($128m) issue, a sign of growing interest on the part of smaller banks to raise equity to comply with new capital requirements. The pace of issues quickened in the year’s final quarter with smaller issues by taxi operator Express Transindo Utama, whose IPO was 17 times oversubscribed, heavy equipment operator Kobexindo Tractors and bottled water producer Tri Banyan Tirta.

The strong market response demonstrates the appeal of Indonesia’s domestic consumption story: with roughly 15% of the population in the middle class, about the size of Malaysia’s population, low household debt of around 30% and likely continued expansion in bank lending, the fundamentals of domestic consumption are widely seen as sound for the next decade. The majority of demand for new issues comes from offshore investors, particularly from emerging market funds, according to local traders. Despite encouragement from the market, however, the value of IPOs has not met expectations. “The pace of privatisations has not been as expected due to the reorganisation within the Ministry of State-Owned Enterprises (MSOE),” Anton Gunawan, chief economist at Bank Danamon, told OBG.

PRIVATISATION HOLD-UP: While many would-be issuers, particularly those linked to commodities and natural resources, stayed on the side-lines during 2012 awaiting more convincing growth on the exchange, delays in privatisation of state assets has also weighed on the average size of issues.

The Krakatau Steel IPO in November 2010 raised allegations that the MSOE had set the share price at an excessively low Rp850 ($0.085) a share, lower than the level recommended by underwriters Bahana, Danareksa and Mandiri, and the shares rose 49% to Rp1270 ($0.127) on the first day of trading. Using the same underwriters, the MSOE fixed a much higher price for the IPO of flagship carrier Garuda Indonesia at Rp750 ($0.075) a share in February 2011 in the largest IPO in three years. Although it successfully raised $510m in equity via significant share purchases by state-owned enterprises (SOE) like Jamsostek, the MSOE valuation set prices at 16.4 times 2010 earnings, higher than regional peers Singapore and Malaysia.

The incoming minister of the MSOE froze further privatisations pending a restructuring of SOEs under a smaller group of holding companies. Likewise, SOEs have awaited improvement in the price of the last two privatisations, with Garuda share prices only returning to IPO levels in late 2012. “Listing SOEs has been very sensitive since the under-valued Krakatau IPO and the over-valued Garuda one,” Wisnu Wardana, economist at Bank CIMB Niaga, told OBG. “This caused some delays, but we do expect more in the coming year, with Waskita Karya leading the first charge at the close of 2012.”

With only 20 out of over 100 SOEs listed on IDX, the MSOE announced in January 2012 its intention to part-privatise eight firms that year, although all had been delayed by December, including the 35% sale of Semen Baturaja and pawn shop operator Peyadaya. However, these are all slated for privatisation in 2013, as are: Industri Telekomunikasi Indonesia, garments producer Industri Sandang Nusantara, Omni Hospitals, Perkebunan Nusantara III (one of 14 state-owned plantations operators in oil palm and rubber) and glass producer Industri Gelas. State-owned construction firm Waskita Karya re-launched the privatisation process in late December 2012 when it raised roughly Rp1.17trn ($117m) by selling a 32% stake.

INCENTIVISING ISSUES: Although the number of issuers has grown, it remains unclear whether the current incentives structure is a significant factor. Firms floating over 40% of their shares on IDX benefit from a permanent corporate tax reduction of 500 basis points to 20%. Yet in practice very few firms have listed this amount, with mostly state-owned banks opting to sell over 40%. Indeed, with average free floats of only 20%, it will be incumbent upon the new regulator to move forward to increase the size of issues. Many firms tend to sell only minority stakes as a source of new funding, rather than dilute their commanding stakes. Meanwhile, strictures of quarterly reporting and listing standards often take up to a year to comply with. Following the allegations of poor governance in the Bumi affair, however, it is likely that authorities will make requirements stricter rather than looser.

The market has not witnessed any listing by a foreign firm since 1997, when new rules allowing the issue of Indonesian Depository Receipts was passed. Foreign banks like CIMB and Maybank have indicated interest in a dual listing in Kuala Lumpur and Jakarta, but insist that some regulations would need to be adjusted to allow such a listing. The regulator, Indonesia Financial Services Authority, had already started to streamline procedures for listing in July 2012 (to be implemented in 2013), reducing the current time for listing of 45 days by up to 10 days. This reduced lag time should allow for better issue pricing to reflect current market conditions and appetite. Authorities are expected to prompt firms in certain strategic sectors to list, most notably in mining. A provision in the new March 2012 government regulation on mining, applying to new exploration and production contracts only, requires foreign investors to sell over 51% of their shares to Indonesians within 10 years of the agreement.

ISSUES PIPELINE: Aside from the delayed privatisations, a number of listings of various sizes are expected in 2013. The exchange itself is aiming for 30 new companies listed worth an expected Rp15trn ($1.5bn) and a total of 55 secondary rights issues worth Rp60trn ($6bn). A number of these firms were already well advanced in their preparations by late 2012, including low-cost Indonesian airline Lion Air, which postponed plans to raise over $1bn on the local exchange in 2012. State-owned postal firm Pos Indonesia, which is planning an IPO in the second half of 2013, is currently preparing a business plan for the next five years as part of the proposal. The types of firms seeking listing are refreshingly diversified, including a second taxi operator BlueBird, expected to list in mid-2013.