Indonesia’s only high-performance paper producer, PT Fajar Surya, has started to pre-market the country’s first $100 million plus equity deal since May.
The deal should provide a litmus test of foreign funds’ appetite for Indonesian primary market offerings following the headwinds which have pummeled the market since early March.
The Jakarta Stock Exchange is down 8.11% year-to-date, putting it in the middle of the Asian pack. The rupiah’s sharp fall against the US dollar, however, makes the situation far worse for most international investors.
As of Monday’s close, the rupiah was trading at Rp15,187 ($1), down 12.04% year-to-date. That makes it the third worst performer against the US dollar in the region, after the Pakistani and Indian rupee.
And as many economists have pointed out, none of the issues which have put the currency under pressure, have gone away.
The US Federal Reserve continues to raise rates, liquidity is still being removed from global financial markets, and Indonesia’s current account deficit may widen further if the Jokowi government decides to loosen fiscal policy ahead of the forthcoming general election next May.
Not all of 2018’s deals, however, have traded down.
Both of the Indonesian Islamic banks, which executed IPOs in May, have traded up. PT Bank Tabungan Syariah, for example, has risen 72.3% to Monday’s close from its Rp975 IPO price.
Investors may, therefore, overlook the market backdrop if they feel that Fajar Surya is offering a compelling enough valuation.
Sole global co-ordinator Credit Suisse has pegged fair value for the company at $1.4 billion to $1.9 billion. This represent a 2019 P/E range of 10 to 11 times and EV/Ebitda range of 7 to 7.7 times.
This is double the level at which Chinese comparables such as Nine Dragons and Lee & Man Paper currently trade. Both of the Hong Kong-listed companies are trading well below half their respective historical means of 12 and 10 times forward earnings.
Nine Dragons closed Monday at HK$7.93 ($1.01) per share on a forward P/E of about 5.34 times. It has dropped almost 45% over the past year.
Lee & Man, meanwhile, closed at HK$6.89 on a forward P/E of about 5.85 times. It has lost about 30% over the past year.
Both companies have been affected by China’s environmental-led clampdown on mills that use contaminated paper, which has prompted them to accelerate plans to expand overseas. This is one of the main reasons why local bankers say that Fajar Surya deserves a premium.
The other is its higher pricing power and growth trajectory.
The company uses recycled paper as its raw material and is Indonesia’s only producer that specializes in high quality, lighter paper that reduces clients’ packaging costs.
Most of its sales come from Indonesia which makes it a domestic consumption play. It is particularly geared to e-commerce trends since its paper is largely used for electronics, home appliances and food.
But the company is also growing exports rapidly. Net sales have jumped from 1% in 2016 to 15.4% in 2017, according to its investor document. Around 90% of these are destined for China and the company hopes to expand the total to 40% to 50% of net sales within the next few years.
Fajar Surja plans to use proceeds to re-pay debt and to fund its acquisition of capacity in East Java. As of June, it was running at 103% production capacity compared to 78% one year earlier.
This helped push net income up 140.4% year-on-year to Rp407.3 billion in the six months to June.
Lead manager Credit Suisse and domestic lead Ciptadana have sensibly gone out with a wide range that can be cut to fit market conditions. This embraces a freefloat expansion from a minimum of 2.5 percentage points (to boost the freefloat from 5% to 7.5%) to a maximum of 15.8 percentage points.
The deal has been structured as a rights issue cum placement.
The rights offering comprises up to 496 million shares, equating to 16.67% of the enlarged share capital. The controlling shareholders will not subscribe, facilitating a placement of up to 15.8% of the enlarged share capital prior to the rights offering itself.
Formal roadshows are scheduled to begin during the first week of November with likely deal proceeds of $150 million at the mid-point of the range.
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