Who would require pricy shares in Garuda?

Market moves based on expectation. Everybody knows this simple rule. But some might find difficulties in defining which one is justified-expectation and which one is false flag.

When Bisnis Indonesia reported that some strategic investors are eyeing ownership in the state-controlled airlines PT Garuda Indonesia Tbk, the market is in hunting party for the share, although the price was reported lower than its initial public offering (IPO) price.

It soared 9.09%, or 45 points, to IDR540 per share in Tuesday’s closing session, responding the information that Hong Kong-based Cathay Pacific Airways and the US-based Delta Air Lines are among the investors.

In the midday breaks, the shares closed 7.07% higher from the opening position. Bloomberg’s report on Cathay Pacific’s denial saying, “we have no such intention,” was not enough to stop such rally in the second trading session.

Such increase continued the three consecutive days rally from IDR470 per unit on last Thursday. On year to date basis, the GIAA-coded stocks has climbed 13.68%, higher than Jakarta Composite Index’ (JCI) to date-rally of 3.06%.

But could this move justified, or it was just another ‘painting the tape’ scenario done by big players in the market? Well, we may need to check the circumstance to understand why the market reacted impressively positive.

The Deputy Minister of State Owned Company (SOE) on Service Sector Companies Parikesit Suprapto affirmed the information, saying some investors are interested to buy 10.88% shares in Garuda. But however, he did not mention their identity.

And who are the Hong Kong-based Cathay Pacific Airways and US-based Delta Air Lines anyway? Let us check their portfolio.

Cathay Pacific Airways Ltd operates scheduled airline services besides related services including airline catering, aircraft handling, and engineering. Its market capitalization is lower than Garuda’s, with only IDR12.23 trillion, compared to Garuda’s market capitalization of IDR13.65 trillion.

It means Garuda has higher value in the market, and even too pricy as the lower-yield put into consideration resulted to 33.91 times of price to earning (PE) ratio, compared to Cathay’s PE ratio at 5.42 times.

How about Delta Air Lines? Well, the company is actually turning on its radar to acquire promising company. The second largest U.S. airline is among the cash kings of New York Stock Exchange issuers.

The DAL-coded company ended June 2011 quarter with US$1 billion of operating cash flow and US$700 million of free cash flow. Not to forget its US$5.6 billion of unrestricted liquidity, allowing it to pledge US$1 million cash for Japan tsunami aid.

Recently on December 7, 2011, the airline announced plan to acquire Brazil-based carrier, namely Gol Linhas Aereas Intelegentes. Delta Air plans to acquire a minority stake in this Brazil’s second largest airline, ignoring the unimpressive prediction of global carrier industry in 2012.

Delta will buy a 3% of stake in Gol Linhas for US$100 million and become a member of its board. Gol Linhas is a low-fare, non-stop carrier, through its fleet of latest Boeing airplanes to serve the domestic route in Brazil.

The carrier, interestingly, quite close to Garuda’s situation now—which is offering minority stakes (around 10%, held by its IPO underwriters) and possibly giving away some positions in its board.


Price matters
During the road show in Hong Kong exactly 1 year ago, Deputy Minister on Strategic Planning and Restructuring Achiran Pandu Djajanto told me that Garuda, indeed, had not showing impressive performance.

But, however, as he said, one should not ignore Garuda’s position as the leading player in the carrier industry, in this biggest archipelago country—which is very promising for airline business. Thus the IPO price reflects these factors.

“In my opinion, we should put them all as good will for Garuda, or as the appreciation value of the company,” he said at that moment.

Today’s GIAA price jump—which will benefit stockholders, particularly the state-owned securities companies who own the stock as the consequence of running Garuda’s IPO with full commitment—are driven by many brokerage houses.

Among them, only PT Mandiri Sekuritas used the momentum to sell the shares, face to face with PT Danareksa Sekuritas as one of the top seven buyers. PT Bahana Securities is not in the top list of the buyers nor the sellers of GIAA.

However, the IDR52.82 billion total transactions today—ironically—leads to a new challenge. With the higher expensive market price, and PE ratio of 33.91 times, the more reluctant investor will be to buy the shares.

With such expensive PE ratio, Cathay might be right when saying that the carrier has no intention to spend pennies for Garuda’s share. According to Bloomberg, the PE ratio of airlines sector is now at 13.56 times, almost a third of Garuda’s ratio.

It means, the transaction might be further from being realized, unless they sell it with discounted price compared to the IPO price—or unless they can provide very profound arguments during negotiation that makes the investor accept the price, which is hardly possible to happen.

As for now, those underwriters decline to specify this issue. But even so, they would be fine with whoever the buyer, as long as they can dispose Garuda shares at better price than its lowest level of IDR395 on October 19, 2011. Wouldn’t they?