(TIS) – Indonesia has IPO fever. Proceeds from initial public offerings this year look set to double from 2012, reaching IDR20 trillion ($2.04 billion) or more as at least 30 companies bet on strong investor interest in the fast-growing domestic economy and improving perceptions of the sophistication and stability of the local capital markets.

A recent deterioration in economic conditions is doing little to dampen spirits: while recent capital outflows add to a weak rupiah caused by a gap in the balance of payments, a stalled plan to lower fuel subsidies, weak exports and a relatively elevated inflation rate, most in the market are shrugging off the reversals – with even Bank Indonesia stating quite clearly that it doesn’t think the outflows are anything to be concerned about.

(See Vox below.)

The unprecedented number of IPO’s reflect what appears to be an increasingly bright long-term outlook for Indonesia’s economy – there are plenty of risk factors to take into account (see TIS Analysis and Outlook data sections below), but for now, market players seem almost universally eager to bet big on getting deals done on the Indonesia Stock Exchange (IDX.)  

IDX chief Ito Warsito is definitely among them. The bourse is optimistic of raising IDR20 trillion ($2.04 billion) or more from new IPO’s by at least 30 companies this year, double last year’s figure of IDR10.14 trillion in cash from 23 deals.

On top of 10 companies that listed between January and May, 22 more plan to debut by the end of the year – with an unprecedented 15 market debuts due between now and early July.

Between January and May, 10 companies listed on the IDX with a total value IDR4.81 trillion.

(See TIS data section below for a full list of upcoming IPOs and deals that have been done already in 2013.)

There were also 22 bond issuances from 19 companies with total value of IDR25.90 trillion, compared with a full-year 2012 count of IDR69.35 trillion and US$20 million (IDR196 billion) in bonds in 68 issuances by 53 companies.

“We’re quite optimistic this target will be achieved, because there are several companies that will use their first-half financial results [to seek] to raise higher proceeds from IPO’s. The proceeds will likely double from last year,” according to Warsito.

Daily volumes on the bourse that have reached a high of IDR6.64 trillion are an encouraging sign that the fat pipeline of IPO’s can get done – net foreign inflows remain high at around IDR20 trillion since the start of the year, despite global economic jitters prompting a few recent days of net foreign sales,  Warsito says.  

TIS Analysis:

The outlook certainly appears bright for those willing to take a chance on a well-established counter or two in one of the world’s hottest economies. But there are warning signs that the good times may not last as long as might be expected.

For one, the U.S. Federal Reserve has hinted recently that it will taper asset purchases – many market watchers expect that to happen before the end of this year.

The potential impact of a QE scaleback on the Jakarta Composite Index is very difficult to assess at this stage, particularly given the momentum that has built up – a closer examination is needed of just how much cash local players have that can fill the gap if U.S. investors become jittery and back away.

Another factor to consider is the Bank of Japan’s “bazooka” – the BOJ has announced an asset-purchase plan that in terms of the relative size of its economy, is even more ambitious than the Fed’s.

Japanese investors are very familiar with Indonesia – the two countries are from the same neighbourhood and have a long history of investment ties.

Hard investments by Japanese firms looking for affordable, skilled labour are stepping up,  as is inbound Japanese M&A investment – the most recent Abenomics-driven deal is by Toyota Tsusho Corp., which earlier this year announced a property investment in Indonesia, and this week bought 4.9% or PT Astra Otoparts, the first time it has owned a stake in a non-Japanese spare parts maker.

Initial indications are that it’s quite likely Japanese banks, pension funds and securities houses flush with Abenomics cash could fill much of any potential portfolio investment gap if U.S. buyers become jittery.

On the other hand, there’s the valuation case; rapid surges in recent months have taken the JCI above 5,000 points for the first time in its history, indicating IPO valuations will be richer than they may have been.

While most other Southeast Asian stocks are currently at rich valuations as well, there are other emerging markets – how long can the world’s current investment darling retain its sheen before buyers of stocks decide to seek returns in other regions?

Local investment demand is another massive factor to consider: Indonesia is growing fast, and locals have stepped up to support stocks when foreigners have sold off recently.

It remains to be seen how much Indonesia’s investors are willing to bet on their own market – but current indications are that domestic players are becoming more willing to ignore the doldrums in the U.S. and Europe and bet on their home team.  

Finally, the elephant in the room: the 2014 presidential election.

There’s precedent: in Malaysia, investors exited the KL index and flocked into the bond markets about three to four months before the country’s recent election.

Reversals began in the days after Najib Razik’s victory early this month.

With investor darling President Susilo Bambang Yudhoyono term limited and his Democrat Party lacking a realistic candidate for next year, uncertainty is high.

The unreliable nature of local polls doesn’t help – of the most prominent candidates, none are well liked by markets.

Currently there seems to be a vague consensus that Prabowo Subianto is the most popular among the current crop of candidates at this stage, but Indonesian politics are notoriously choppy waters to navigate, and even this nebulous sense of who is in front is likely to remain in flux until well into campaign season – and it’s a near certainty that the election will throw up several black swans, or at least dark horses.

None among Democratic Party of Struggle (PDI-P) party chief and former President Megawati Sukarnoputri, Golkar chairman and private businessman Aburizal Bakrie, or any of the other unpromising potential candidates that comprise next year’s crop appear to have anything approaching a clear strategy at this stage.

Prabowo  himself has made vaguely encouraging noises about social inequality and alternative energy, but the few times he’s even come close to outlining economic specifics, his ideas have been narrow in scope, such as shifting more of the economic focus away from Jakarta.

Neither Prabowo or any of the other candidates have made genuine attempts to outline a clear national economic policy to serve as a campaign plank.

Given this uncertainty, it seems a clear likelihood that companies planning IPO’s will want to front-load them before the end of the third quarter, or November at the latest – those who get in early may find that their deals get done a lot more smoothly.

Overall, for the next few months, IPO fever does appear to present some genuine opportunities to gain a foothold in an exciting developing market – though buyers will be well advised to hang on tight for the ride.  

Vox

– Bank Indonesia expects capital reversals to be short-lived, and will guard rupiah

“The recent weakness in the rupiah is caused by global sentiment,” as market expectations that the U.S. Federal Reserve will soon begin tapering off its quantitative easing asset-purchase program have led U.S. investors to withdraw their money from emerging markets, Bank Indonesia (BI) deputy governor Perry Warjiyo told reporters last week.

"This has caused a reversal in Asia. Regional currencies are under pressure.”

“BI has already, and will continue to, act to stabilize [the rupiah] via the dual intervention method in the foreign exchange market and by buying government bonds on the secondary market. In the FX market, we intervene in spot, swaps and forwards.

The government bonds being sold by foreigners are from short-term investors. Long-term investors are hanging on to our government bonds. I don’t think there will be a very big reversal. What is happening is just selling by short-term traders, not long-term. In the last two days capital reversals have eased. Domestic players have also begun buying government securities.”  

Outlook data: Choosy investors can expect good returns

- Bahana Local securities firm PT Bahana Securities notes that in 2012, “had we invested in all of the IPOs, the average return today would have been 137%, despite five counters ending down below their IPO price.”

It notes the 10 listings done so far this year show an average return of 57%, although five are not performing: four are below their IPO price and one is flat.

It advises buyers to choose counters with promising growth prospects, sound fundamentals and strong management

– it also tips checking whether a deal is correctly priced to avoid paying over the odds and attract coveted long-only institutional buyers, and lastly, warns buyers to look closely at the amount of shares on offer to make sure liquidity will be sufficient following the listing.  

TIS Top picks

The following are five highlights from the IPO boom identified by TIS that may be of interest to readers. TIS does not provide investment advice and has no position in the stocks mentioned. (See disclaimer below.)

• Exhibition organizer PT Dyandra Media International (IDX:DYAN.), a unit of KompasGramedia Group, sold 1.282 billion shares at Rp.350 a share in a March 15-19 public offering, with the public portion oversubscribed  40.6 times for a total of IDR450 billion. Shares rose 10% to IDR385 on the company’s trading debut, indicating it could potentially have priced the IPO even higher.
• Saratoga Capital, one of Indonesia’s biggest private-equity players and a trend-setter that tends to attract a lot of attention when it makes investment decisions, appears to be betting big on IPO’s. Its Saratoga Investama Sedaya is set to become the first publicly traded company providing PE services in Indonesia with a mid-year IDX debut expected to bring in $230 million. That would follow on from an IPO by Saratoga’s motorcycle dealership unit early this month, which although it priced at the bottom of its indicative range of IDR1,500-IDR2,000, still netted US$153 million. Saratoga has so far invested $135 million of the proceeds from a $600 million 2011 fundraising exercise, and has $2 billion under management. Saratoga will be hoping to match PE rival CVC Capital Partners Ltd. in making bank on its Indonesian investments –CVC almost doubled its money on PT Matahari Department Store (LPPF), earning $1.3 billion from the sale of a stake in the retailer that it bought for $790 million only three years ago, although the shares were sold privately rather than on the IDX.
• Lippo Group is another market bellwether that is putting its money on IPO’s. Lippo-owned bank Nobu National has set an indicative range of 325-400 rupiah a share for its upcoming listing of 2.155 billion shares or 52% of enlarged capital, seeking to boost its Tier 1 capital from IDR252 billion to above IDR1 trillion, in order avoid having its functions restricted to basic services like providing savings accounts and currency exchange services under a new Bank Indonesia regulation. Lippo Group, one of Indonesia’s biggest conglomerates that focuses mainly on high-end property, owns a 60% stake in the boutique lender which it bought for $60 million in 2010. Lippo also plans to list PT Multipolar Technology for IDR1 trillion and plans to list Siloam International, although the indicative amount for the hospital operator isn’t yet known.
• State-owned cement producer PT Semen Baturaja plans to raise as much as IDR1.60 trillion from an IPO of 2.338 billion shares or 23.76% of enlarged capital next month and has set an indicative price range of IDR500-IDR685 a share. Semen Baturaja appears to be cashing in on strong growth in the property sector and a massive infrastructure drive planned by the government – it wants to use the IPO proceeds to help fund a plan to more than double its output, hoping to reach 3.5 million tons a year by 2016 from 1.25 million tons now.
• PT Mandiri Sekuritas, the country’s biggest securities firm, plans to underwrite 10 IPOs and 20 bond issuances with a total value of IDR32 trillion ($3.3 billion) this year –highlighting growing interest in Indonesia by foreign and local investors and an increasingly sophisticated domestic financial sector. Between January and May, state-owned ManSek underwrote Dyandra Media International’s IPO that netted over IDR450 billion, along with bond issuances worth IDR9.7 trillion. In the second quarter it plans to handle IPO’s for a construction company and an infrastructure company with total value of IDR5.8 trillion, along with rights issues for a consumer-focused company and one in the financial sector – though it’s keeping quiet on who the companies are for now.

TIS Data: 32 companies to list this year

All 32 companies that plan to list this year have held mini-“exposes,” the local term for investor information days, with 22 firms planning at least IDR13 trillion in June and July alone. A full list follows. (For highlights, see TIS top picks section below.)

Upcoming IPO’s and estimated proceeds:

Plantation company PT Dharma Satya Nusantara - IDR509 billion

Textile company PT Sri Rejeki Isman - IDR1.5 trillion

Cement producer PT Semen Baturaja - IDR1.6 trillion

Investment company PT Saratoga Investama Sedaya - US$230 million

Retail company PT Electronic City - above IDR1 trillion

Information technology provider PT Multipolar Technology -

IDR1 trillion Construction company PT Acset Indonusa - IDR413 billion

Transportation company PT Eka Sari Lorena Transport - IDR400 billion

Transport, heavy equipment and resources company PT Cipaganti Citra Graha - IDR300 billion

Construction company PT Nusa Raya Cipta - IDR300 billion Hospital manager PT Siloam Hospital – unspecified

PT Bank Muamalat Indonesia - IDR2.5 trillion

PT Bank Mitraniaga - IDR300 billion

PT Bank Mestika – unspecified

PT Bank Maspion – unspecified

Property developer PT Pembangunan Deltamas - IDR1 trillion

Automotive component supplier PT Indoprima Gemilang – unspecified

Transportation and cargo company PT Siba Surya – unspecified

Paper company PT Pelita Cengkareng – unspecified

Plantation company PT Pacific Agro Sentosa – unspecified

Packaging company PT Tunas Alfin  - unspecified

PT Apexindo Pratama Duta - unspecified  

The IPO’s launched in January-May period, raising IDR4.81 trillion: PT Pelayaran Nasional Bina Buana (BBRM) PT Saraswati Griya Lestari (HOTL) PT Sarana Meditama Metropolitan (SAME) PT Multi Agro Gemilang Plantation (MAGP) PT Trans Power Marine (TPMA) PT Steel Pipe Industry of Indonesia (ISSP) PT Dyandra Media International (DYAN) PT Austindo Nusantara Jaya (ANJT) PT Bank Nationalnobu (NOBU) PT Mitra Pinasthika Mustika (MPMX).  

Disclaimer: This report is intended for research purposes only and is not intended as investment advice. TIS makes no guarantee for the accuracy of this research, and accepts no liability for any factual errors or inaccuracies contained therein. TIS has no positions in securities mentioned in this research.

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