Giant IPO seals return of Japan Airlines

LESS than three years after it collapsed into bankruptcy, Japan Airlines (JAL) made a modest return to the market yesterday, with its shares closing 1 percent above the price set for the second-biggest initial public offering (IPO) of the year.

The $8.5 billion (R69.9bn) IPO had been priced conservatively to take account of the airline industry’s tough outlook, with full-service carriers such as JAL under threat from low-cost operators in an already weak economy.

JAL’s stock opened around 3 percent above the IPO price of ¥3 790 (R397), but soon levelled off to close 1.1 percent higher at ¥3 830 – ranking it alongside Air China as Asia’s second-biggest airline by market value. Singapore Airlines is the biggest.

Traders had suggested that JAL, which emerged from bankruptcy with the highest level of operating profits in the industry, might climb as much as 10 percent on its market return given trading indications on the grey market.

CLSA Asia-Pacific Markets initiated coverage with a buy rating on the stock, while Macquarie Capital Securities rated it outperform. Both cited attractive valuations with a price-to-earnings ratio of about 5, around a third of the industry average.

But both also noted the tough outlook for legacy, fullservice airlines like JAL given increasing competition from budget carriers. Also, Japan’s air travel market offers little prospect for volume growth.

“We find it difficult to recommend JAL or any other Japanese airline as a longterm fundamental investment,” Macquarie analyst Nicholas Cunningham wrote in a client note. “In short, our recommendation comes down to a valuation call.”

Brokers had warned that Japanese retail investors, who took up 70 percent of the IPO, might be quick to take profits given uncertainty over whether JAL’s earnings might have already peaked.

“I’m not too bullish on JAL. Low-cost carriers have a larger market share now and competition is fiercer. It’s unclear whether they can maintain their current level of profit,” said Masato Futoi, the head of cash equity trading at Tokai Tokyo Securities.

Budget airlines make up less than a tenth of the Japanese market but are expected to grow that to almost 25 percent. JAL is part-owner of JetStar Japan, a budget carrier run in partnership with Australia’s Qantas Airways.

“Listing our stock is just the starting line for us as a private company,” JAL president Yoshiharu Ueki told a Tokyo Stock Exchange briefing.

A state-backed fund that injected ¥350bn into the carrier sold its 96.5 percent stake in the IPO, generating a $4bn profit for the fiscus. – Reuters