American tobacco giant Philip Morris International echoed the Indonesia Stock Exchange’s call for bigger free floats on Monday by launching a share sale worth up to Rp20.3 trillion ($1.4 billion) in local unit PT Hanjaya Mandala Sampoerna.
Sampoerna is Indonesia’s largest public company with a market capitalisation of Rs326 trillion. Yet, intriguingly, it is not a constituent of the Jakarta Composite Index as its free float has been below 2% since Philip Morris took over the company in a $5.2 billion deal in 2005.
Due to the low number of shares in circulation Sampoerna, Indonesia's largest cigarette manufacturer, has operated almost like a private company. On average only 8,200 of its shares have changed hands every day in the last five years.
But that now could change with the company set to more than quadruple its free float to 7.51%.
Technically the deal has been structured as a 4-for-65 rights issue whereby Sampoerna will issue 269.7 million rights shares based on its total outstanding shares of 4.38 billion. After the rights issue Philip Morris is expected to place all of its entitled 264.2 million shares with institutional investors.
Instead of a direct secondary share placement, the American cigarette maker has chosen a complex way of offloading its stake for tax reduction purposes, a source familiar with the situation told FinanceAsia.
A management roadshow began Monday and ends September 30.
Goldman Sachs, JP Morgan, Citigroup, Credit Suisse and Mandiri Securities are joint bookrunners for the transaction and trading in the new shares is slated to start October 26.
Sampoerna is the largest cigarette manufacturer in Indonesia with a 35.3% market share, followed by Gudang Garam on 25.9% and Djarum on 19.3%, according to a company report.
IDX free float
By the end of January 2016, all Jakarta-listed companies will have to comply with new exchange rules that require listed companies to have a free float of at least 7.5%. The rule has been effective since January 2014 but listed companies were given a two-year grace period.
Free-float requirements will be tighter for companies looking to list for the first time. They are required to make 10% of their shares available for trading if their valuation is at least Rp2 trillion, rising to 15% where a company is valued at between Rp500 billion and Rp2 trillion and 20% for those with a market capitalisation below Rp500 billion.
In addition all companies are also now required to have a minimum of 300 shareholders. Failure to comply could risk trading suspension of even a delisting, the Indonesia stock exchange has said.
The new rules dovetail with a pledge made by the exchange's newly-appointed president director, Tito Sulistio, to triple the total value of shares traded on a daily basis in Jakarta to Rs15 trillion within three to five years.
According to a fund management source, demand for Sampoerna's looming share sale will likely come mainly from passive and index funds because of the high possibility that it will subsequently be included in benchmark indexes such as the Jakarta Composite and MSCI Indonesia.
The deal could also benefit from some stock rotation as fund managers reallocate their consumer stock holdings. “The largest cigarette maker in Indonesia is something you don’t want to miss in your portfolio,” a second fund manager said.
Sampoerna is being marketed at a discount to food and personals care product retailer Unilever Indonesia, which trades at 50.7 times consensus earnings on a trailing twelve-month basis and 48.5 times on a forward twelve-month basis.
But it will come top of parent Philip Morris, which is trading at roughly 17 times trailing twelve-month earnings on the New York stock exchange. Shares in Japan Tobacco, the largest tobacco company in Asia by volume, are also cheaper and currently priced at 18 times earnings.
Tobacco companies globally are well-known for paying generous dividends because of their strong cash flow and inelastic product demand, and Sampoerna is no different. The cigar maker is expected to have a dividend payout higher than 100% over the next three years as it has more than sufficient cash for capital expenditure, the company report showed.
At that level of dividend payout, the current price range implies a dividend yield range of 3.4% to 4.1% in the 2016 financial year.
Negatives
On a negative note, Sampoerna will be subject to increased excise duties on cigarettes as it remains an important source of state revenue. In the proposed 2016 budget, the government targets Rp149 trillion from tobacco duties, which is 6.8% higher than the 2015 target.
In order to reach that target it is widely expected that the government will raise duties by 15% to 20% in the next two years. While the proposed budget is still being discussed in parliament, it is almost certain that tobacco makers will continue to face higher excise duties.
There is also a possibility for Jakarta to raise the value-added tax on cigarettes, which currently stands at a flat rate of 8.4%.
That said, cigarette prices in Indonesia remain the lowest among Southeast Asian nations. Prices for cigarettes range from 75 US cents to $1.65 per pack in Indonesia compared with about $3 to $5 per pack in Malaysia and Thailand, according to cigaretteprice.net.
Indonesia’s slowing economic growth could also negatively impact Sampoerna's business because almost all of its revenue is derived from within the country. The country recorded year-on-year GDP growth of 4.71% and 4.67% in the first and second quarter, respectively. Both fell short of the government's 5.7% full-year target.
