Japan Airlines has set a tight pricing range for its initial public offering, in an indication of strong demand among investors for the state-backed flag-carrier that tumbled into bankruptcy two years ago.
On Thursday JAL said it would offer shares at between ¥3,500 and ¥3,790, raising up to ¥663-billion ($8.4-billion) in what should rank as the world's second-largest IPO this year, after Facebook.
The narrow pricing range – about half the typical spread for the biggest Japanese deals, according to Dealogic – suggests that underwriters are confident of persuading investors to back the long-anticipated offer, even in a relatively weak equity market.
Under Kazuo Inamori, the founder of electronic company Kyocera, JAL has restructured its route network, rationalized its fleet of aircraft, cut staff, sold non-core assets and strengthened its balance sheet. In July it entered the low-cost carrier market through Jetstar Japan, a joint venture with Qantas of Australia and two other Japanese partners.
With an operating margin of 12.2 per cent in the year to March, it ranks as the most profitable flag-carrier in the world, according to Bloomberg data.
"It has been a significant turnround in the business," said Nicholas Cunningham, analyst at Macquarie Securities in Tokyo.
At the top end of its indicative pricing range JAL would surpass All Nippon Airways as Japan's biggest carrier by market value, and would rank as the fourth largest worldwide, behind Latam Airlines Group, Singapore Airlines and Air China. At the lower end it would rank fifth, ahead of Ryanair, Delta and Cathay Pacific.
Either way, the Japanese government can be confident of making a significant return on the ¥350billion it injected into JAL in early 2010. All 175 million shares are being sold by JAL's parent, the state-owned Enterprise Turnaround Initiative Corp.
At the midpoint of the range, the offer values JAL at just over five times forecast earnings in the year to March 2013. However, under existing laws JAL will likely pay no corporate tax until 2019, thanks to credits earned against writedowns. If investors were to apply a standard corporate tax rate to those earnings, JAL's forward price/earnings ratio moves to about 8 times, a slight discount to the global aviation sector.
Japan's equity market, the world's second biggest by capitalization of listed companies, has been lacklustre in terms of new issuance, with a total of $1.7-billion raised so far this year. That compares with $15-billion in Shanghai, $5.5-billion in Hong Kong and $2.1-billion in Singapore.
Underwriters led by Daiwa Securities aim to sell about three-quarters of the shares to Japanese investors. The vast majority of those will go to retail investors, according to a person familiar with the plans.
A one-week book-building process begins on Friday. The final price is due to be set on Sept. 10, with trading set to start on Sept. 19.