Japan Airlines sets IPO at $8.5 billion in sign of strong demand

September 11, 2012

REUTERS

Japan Airlines Co. Ltd. set the pre-market price for its initial public offering at the top end of the range, raising $8.5 billion for state coffers in a sign of solid demand for the world's second-largest IPO this year.

Japan Airlines (JAL), which has emerged from its 2010 bankruptcy with a clean balance sheet and industry topping profits, set the IPO price at 3,790 yen ($48.55) per share on Sept. 10 after gauging investor demand at 3,500 to 3,790 yen. It will list on the Tokyo Stock Exchange on Sept. 19.

At the pre-market price, the company will raise 663 billion yen ($8.49 billion), nearly double the 350 billion yen injected by a Japanese government-backed fund following the airline's failure with $25 billion in debts in early 2010.

The fund, the Enterprise Turnaround Initiative Corporation of Japan (ETIC), is selling its 96.5 percent stake in Japan Airlines in the IPO, which ranks second this year behind the $16 billion offering by social network giant Facebook Inc.

Attractive valuations and a strong balance sheet, bolstered by massive debt forgiveness in the wake of its failure, are expected to ensure the JAL offering fares better than that of Facebook, which was marred by an exchange system glitch.

CHEAPER VALUATION

JAL would trade at a price-to-earnings ratio of 5.3 at the IPO price, based on its profit forecast for the current business year. That's about one third of the valuation of local rival All Nippon Airways (ANA), whose stock tumbled to a multi-decade low last week as investors sold to make room in their portfolios for JAL shares. Asia-wide, airlines trade at a median forward PE of 11.5, with Singapore Airlines Ltd. at 27 times expected earnings and Qantas Airways Ltd. at 10.2 times.

"In a nutshell, JAL looks cheap compared to ANA," said Takashi Nishibori, chief editor of Tokyo IPO, a website catering to individual investors. Nishibori predicted the stock would open at or slightly higher than its IPO price in a modest first-day "pop" when it debuts mid-next week.

Following the IPO, JAL will be Asia's third-biggest carrier by market value, behind Singapore Air and Air China Ltd.

For the business year ended in March, JAL booked a 205 billion yen operating profit, placing it at the top of the notoriously volatile industry. The strong rebound followed a massive restructuring that eliminated a third of its workforce, scrapped unprofitable routes, slashed pensions and retired ageing and fuel-guzzling jumbo jets.

The airline also benefits from a lower interest burden stemming from debt waivers, smaller depreciation costs following a write-down of its fleet, and a $4.5 billion tax credit that it can use to offset corporate tax for the remainder of the decade.

Those provisions have sparked criticism from rival ANA, which has lobbied for measures such as preferential allocation of landing slots to level what it claims is an unfair playing field.

JAL expects its operating profit to fall by a quarter this year to 150 billion yen. In addition to tough industry conditions, the airline must also grapple with rising labor costs as it makes the transition to a private, listed firm.

STRONG DEMAND

In a statement, JAL said it priced the stock at the top end of the range because demand was higher than the number of shares being offered. Three-quarters of the stock will be distributed in Japan with the remainder sold overseas.

Japanese retail investors, who will soak up 70 percent of the offering, were drawn in large part by the coupons for discount air-tickets that come with the shares. These coupons, also offered by ANA, encourage many investors to hold on to their stock for a longer time.

Institutional investors, who tend to be more wary of the industry's prospects, have proved a harder sell.

"This is an airline stock, and the industry is facing tough times," said Kazuyuki Terao, Chief Investment Officer at RCM Japan Co. "I see no reason to invest in this stock."

Daiwa Securities Group is the global coordinator on the offering.

REUTERS
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Japan Airlines' logo (Asahi Shimbun file photo)

Japan Airlines' logo (Asahi Shimbun file photo)

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