Institutional equities broker Decker & Co estimates that around $1.5 billion worth of private placement deals will take place in Indonesia, with companies in the consumer sector leading the offerings.
So far this year, the value of completed transactions is at approximately $500 million, with about six to nine more deals expected to close by year-end. Decker & Co president director Mark Decker believes that robust consumer base and growing middle class in Indonesia helps consumer firms strengthen their performances.
In his interaction with DEALSTREETASIA, he said, “Consumer companies are best positioned to benefit from the improving business environment being fostered by the current regime. Investors looking for the highest-quality companies in the market are going to naturally gravitate toward the Consumer sector, and thus you’ll see more deals getting done with those companies.”
Improved economy, better financial performances
Experts believe that consumer goods remains the king among Indonesian sectors, riding on the back of improving economy and the people’s increasing purchasing power. In Indonesia, household consumption takes up about 55 per cent of total economic growth.
Up until August, consumer goods stocks have been leading the performance of the Jakarta Composite Index (JCI). Its index has risen the highest at 2,418.11 of all indices and has been moving upward since 2008, data from the IDX show.
Companies that operate in the sector – especially food producers – have been reporting rising sales and profits, a fast recovery from the sluggish performances last year.
Salim Group’s Indofood reported a 4.4 per cent increase in sales year-on-year to Rp 34.08 trillion (US$2.6 billion) for the January to June period, supported by sales growth of its Indomie instant noodles producer unit, Indofood CBP Sukses Makmur.
Meanwhile, profit grew by double digits at 29.4 per cent on an annual basis to Rp 2.2 trillion in the first half, contributed significantly to by Indofood CBP’s profits, which surged 11.76 percent annually to Rp 1.9 trillion.
Another consumer goods firm, Unilever Indonesia (UNVR) – the local arm of Anglo-Dutch consumer goods giant Unilever – posted a 10 per cent increase in sales to Rp 20.7 trillion in the first half this year. This growth was higher than the sales growth of 7.4 percent in the same period last year.
Thus, consumer goods companies remain in the spotlight for foreign investments, especially those that are done through private offerings. Decker said companies with lower-quality financials and prospects will not be able to tap capital markets via offerings.
“The most important point is that capital raising opportunities are currently limited to quality companies. There are many high-quality companies across the region in an excellent position to diversify their shareholder base by bringing on institutional investors such as U.S.-based mutual funds while also raising capital to support growth,” Decker added.
Recently, Decker and his company led the private placement deal of beverage producer PT Ultrajaya Milk Industry Trading Company Tbk (ULTJ), who sold 197 million shares at Rp 4,000 ($0.30) apiece, raising $60 million.
Ultrajaya aims to grow its net profit by 33.8 per cent this year to Rp 700 billion ($53.2 million) after posting Rp 523 billion in profits last year thanks to increased demand for its bottled tea Teh Kotak and milk brand Ultra Milk. Meanwhile, revenues are expected to increase 10 to 15 per cent to between Rp 4.83 trillion and Rp 5.05 trillion.
More local coverage required,increasing US interest
In terms of challenges, Decker said that lack of liquidity and lack of coverage have been the main hurdles for investors. Ultimately, he explained, investor interest is generated by accurate views into what’s happening on the ground in Asia.
“So boots-on-the-ground coverage is essential to generating investor interest in the region generally, as well as private placement deals specifically. And our model gives investors a one-stop-shop for the best local coverage, rather than relying on views from larger, foreign brokerage houses,” he said.
Many global funds have been substantially underweight Southeast Asia. On top of that, research coverage is low and the level of analyst sell recommendations is high. “But companies in Southeast Asia, including Indonesia, aren’t standing still. Neither is progress toward regional trade agreements, which we expect to support a coming ASEAN export boom,” said Decker.
A growing number of Indonesian companies are turning to US investors when selling stakes, especially after the relaxation of US regulations around private placement deals, Decker forec.
The relaxation has helped make a difference compared to ten years ago, when Asian companies with deals under $250 million stopped coming to the US because they could get their capital needs met more simply and efficiently in alternative places, such as Hong Kong and Singapore.
“Now, there’s no question that regulatory moves in the U.S. will increase the flow of smaller deals coming to the US… management teams in ASEAN are seeing what’s happening and expressing increased interest in getting deals done with U.S. investors,” said Decker.