Japan Airlines (JAL) returned to the Tokyo stock market on Wednesday with just modest gains after a massive $8.5 billion initial public offering (IPO). Yet, analysts expect to see strong foreign interest in the carrier, which has turned itself around from bankruptcy just 2-1/2 years ago.
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A Japan Airlines aircraft in flight.
JAL shares rose 1 percent on Wednesday, trading around 3,830 yen in Asia trade – just above the IPO price of 3,790 yen and valuing the entire airline at just under $9 billion, which ranks it alongside Air China as Asia’s second biggest airline by market valuation.
Analysts blamed concerns over a territorial disputebetween Japan and China for spooking retail investors—who account for 70 percent of the IPO’s investors—and dampening what would have otherwise been a strong debut for the stock.
Still, according to Ben Collett, Head of Japan Equities at Louis Capital Markets in Hong Kong, the exit of retail investors allows foreign investors to step in and buy up a stock he believes is cheaply valued compared to its peers such as key domestic rival All Nippon Airways (ANA).
“Given the concerns about tensions between China and Japan, retail investors are likely to sell the stock and that would be an opportunity for foreign investors because JAL’s valuation is relatively cheap compared to ANA – by any metric the stock is cheap,” Collett said.
“The chances of JAL dropping below its IPO price are low and we think where it is trading now is a good price, and we don’t say that often.”
Paul Wan, Transport Analyst at CLSA in Hong Kong, said the ownership structure of JAL’s shares showed there was more foreign interest in the stock compared with its peers.
“If you look at the current shareholder structure… 25 percent of the shares are held by foreigners. So if you compare that with ANA, we definitely have a lot more interest from foreign investors – there is about 6.6-7 percent of foreign ownership for Nippon Airways,” he told CNBC Asia’s“The Call”.
Speaking to CNBC, JAL President Yoshiharu Ueki said the island dispute between China and Japan has had some impact on the company.
"We have already seen a slight impact but it is within expectations. I don't think recent developments will change anything. I certainly hope they will not," he said.
Turnaround
JAL’s IPO is the world’s second biggest this year after the $16 billion listing of social networking website Facebookand marks a rare-success for state-backed fund, The Enterprise Turnaround Initiative Corporation of Japan, that poured $4.5 billion dollars into JAL in 2010 after the company went bankrupt in January, 2010.
The fund sold 96.5 percent of its stake in the IPO, generating about $4 billion for the state.
Financial aid and restructuring helped JAL transform from an airline saddled with $25 billion in debt, to a company which recorded a $2.5 billion operating profit in the past business year. After cutting 40 percent of its workforce, slashing routes and scaling back its fleet, JAL's net debt-to-equity ratio is now second only to Singapore Airlines.
This backdrop means the outlook for the airline is positive despite headwinds in the form of high jet fuel prices and intense competition from budget carriers, industry analysts said.
“This is an airline that has managed to restructure its business,” Siva Govindasamy, Asia Managing Editor at FlightGlobal, an air industry news service, told CNBC’s"Cash Flow".“They are doing a lot of the right things and that will put it on a sustainable path and they’ve also had help from the government.”
- By CNBC's Dhara Ranasinghe