IDX Independent Analyst

Prospect of Harum Energy IPO

2010-09-16T18:28:00.003+07:00

When coal company, Berau Coal Energy (BRAU), decided to conduct an IPO some time ago, some of observers had questioned the decision. Because regardless of the fundamentals of BRAU itself, the coal sector in Indonesia in these days is being in a state of decline. At the end of 2009, most of coal companies in Indonesia were enjoying significant increase in revenues and net income, sustained by increase in coal prices. However, in 1Q10, the income of coal companies began to decline, along with decline of volume production. And the decline was still continued in last 1H10.

Take Adaro Energy (ADRO) as an example, which its net profit decreased 48.7% in 1H10 compared to 1H09. Similarly, Bumi Resources (BUMI) , its net profit fell 30.0%. You can check other coal companies: most of them, including BRAU, had declined performance with varying percentages, except maybe some smaller coal companies.

The cause of the degradations is, as already mentioned above, is due to lower volumes of coal production, thus automatically reducing the volume of sales. The reason? Weather factor. In recent months, most areas in Indonesia including coal mine sites are still in under heavy rain though it was entering the dry season. The rainfall is clearly inhibits the production of coal, especially the drying process. As we know, the coal result from the excavation must be dried before it could be used as fuel, where the drying process will be so difficult if rainfall continues. As a result, the overall production process are blocked.

The performance declining in the coal sector, inevitably influence its stock price, although not all of them. Some of popular coal stocks are starting to weaken. ADRO, that some time before had steady at 2.000 to 2.100, now is beginning to fall into the position of 1.940. BUMI is also only capable to move on the 1.700's. What about BRAU? Contrary to the expectations of many observers (including me) who had estimated that BRAU will rise, BRAU was capable to rising for a moment only, then dragged by the weakening of the other coal stocks. When this article was written, BRAU stagnant at position 420, or only up 20 points from its initial price.

The good news is, although most of the coal company recorded a decrease in performance which impact on declining of its stock, but some of smaller coal companies were still able to record improved performance. An example is the Bayan Resources (BYAN) which reported an increased net profit by 45.1% in 1H10. As a result, BYAN now firmly in the position of 9.100, after at the end of June was still in the position of 6.200. That means BYAN had gained more than 40%! Although in valuation the price of 9.100 is too expensive, but because the performance BYAN in last 1H10 is like sticking alone in the midst of sector coal which declined, the stocks remain chaep psychologically, though of course the price at this time is prone to profit taking.

Then how about Harum Energy?

Like the other coal companies that experienced periods of glory in 2009, Harum Energy (HRUM) also recorded significant performance improvements in 2009, where its revenue increased 75% compared to 2008. Its net profit also rose to five times, or exactly 537%.

Unfortunately, HRUM is one of coal company which also recorded a decrease in performance in the year 2010. In 1Q10, HRUM record revenues of Rp 895 billion and net profit of Rp 134 billion . If these numbers are annualized, it will obtain revenue 3.6 trillion and net income of 536 billion for the full year 2010. When compared with 2009, which HRUM recorded revenues 4.6 trillion and net income of 768 billion, then the achievement of performance in 1Q10, is obviously not encouraging.

But what about the performance HRUM in 1H10? Who knows its better? HRUM performance in 1H10 is probably better than 1Q10, but if we look at the weather lately which is still not friendly, then the likelihood is small.

So, would HRUM in the end have fared just as BRAU? Before this conclusion, there is one more factor to consider:

We know that the coal sector is one of the investor's favorite sector in the IDX. The result is, usually the securities or the coal company itself will issued the 'powerful strategy' if the performance of this sector were fell, to attract investors to keep investing their funds in this sector and maintaining the liquidity of market. What is it? Playing with the future , of course (read more http://teguhidx.blogspot.com/2010/08/cara-mencermati-kabar-dari-emiten.html.) The performance of coal companies in 1Q10 and 1H10 are not so good, that's right. But what about the performance of the company in 2011 or 2012? Who knows it will increasing again as the year 2009, is not it?

And indeed that's what HRUM management do. HRUM announced that they expects the volume of coal production of 14.5 million tons in 2012, up nearly three times more than the realization of coal production in the year 2009, which is only 5.8 million tons (http://web.bisnis.com/sektor-riil/tambang-energi/1id207384.html.) For investors, such information may sound like as if the company has realized the coal production of 14.5 million tons (though not yet), so that they would be interested in buying its stocks.

Well the good news is, the stock price of coal is often influenced by positive sentiment like that. For example, PT Bukit Asam (PTBA). PTBA was also noted the decline in performance in 1H10, which its net income dropped 43.0%. But when this article was written, PTBA was firmly in position 18.450. Whereas on 24 August, PTBA was still in position 16.350. What happened? Apparently the relevant company just got a railroad construction project for purposes of transportation of coal (http://www.inilah.com/news/read/ekonomi/2010/08/25/769711/ptba-adani-global-pemda-sumsel-bangun-jalan-kereta-angkutan-batubara/.) The existence of the railway would facilitate the process of the company's production, so that the corporate's earnings in future will likely increase. As a result, the positive expectations of this news had boost PTBA of 12.8% in just a few days. Is PTBA performance in the future will actually increase as expected? Not necessarily.

Back to HRUM. When compared with BRAU, HRUM have better fundamentals because its debts are fewer (even though HRUM debts are also quite a lot). So the news of the production target in 2012 is likely to be responded positively by the market, (although the response might not be as good as the example of PTBA above, because the content of the news is different) so HRUM still have a chance to soar, maybe 10 - 20% on its first trading days, before then fall back or stagnant. Although the option to invest in HRUM is a bit speculative (because only rely on sentiment), but the risk is relatively smaller than if you buy BRAU.

But if your goal is for the long term, you should buy HRUM only if the weather during the dry season in Indonesia is back to normal. Moreover, the price of Rp 5,000 per share is expensive, especially if we look on the outlook of coal sector at this time.

Harum Energy
Rating of performance in 1Q10 : BB
Rating of stock price at 5.000 : BBB

Prospect of Indofood CBP IPO

2010-09-16T14:35:00.001+07:00

Indofood (INDF) is identical with Indomie, because that's their flagship product, which until now seems have no rival (Wings Food indeed is trying to shift the Indomie with Mie Sedaap, but so far apparently not been successful). But actually, business scope of INDF is much broader than simply selling instant noodle with Indomie brand. As the name implies: Indofood, INDF is one of the largest integrated food company in Indonesia, which controls the food sector from upstream to downstream.

As a big company, INDF has a lot of subsidiaries. Below are subsidiaries of INDF with assets above Rp 1 trillion.

1. PT Salim Ivomas Pratama, oil palm plantation companies and their processed products (cooking oil).
2. PT Indomarco Adi Prima, a distributor company
3. Drayton Pte Ltd (Singapore), an investment company
4. Indofood Oil & Fats (Singapore), a cooking oil an margarine company
5. Indofood Agri Resources ( Singapore ), palm oil plantation company. Listed on the Singapore Stock Exchange (SGX)
6. PT PP London Sumatra, palm oil plantation company. Listed on the IDX with ticker LSIP
7. PT Lajuperdana Indah, sugar cane company
8. PT Indolakto, dairies (with brand of Indomilk)

In addition to these companies, INDF also has a subsidiary that is not placed as a subsidiary, but the division, namely Bogasari (producer of wheat flour). Overall, INDF produces and sells wheat flour, instant noodles, milk, flavoring, snack (chiki, crisps and biscuits), nutritious food, cooking oil, and plantation crops and its processed products (including syrup and soy sauce, from sugar cane and soy beans plantations). If we look at the companies above, it would seem that the main business of INDF is actually not in instant noodles, but in cooking oil. One of its famous brand is Bimoli.

INDF's business is also integrated. For example, to send a piece of instant noodles to your hands, then the company has wheat flour processing plants, making noodle factories, manufacture of packaging and cardboard box, until the distributors. Everything is owned by the company. imagine big INDF is? Even one of famous mini store in Indonesia, Indomaret, though not under the INDF, but is also owned by Mr. Anthoni Salim, the owner of INDF.

Back to INDF subsidiaries. Then where the Indofood CBP?

Indofood CBP (ICBP) is actually established in the year 2009, which functioned as the parent company of several subsidiaries of INDF engaged in instant noodles, snacks, flavor, nutritional foods, and milk, including Drayton Pte Ltd and PT Indolakto. So the analogy is, if INDF is the CEO, the ICBP is the director, and Drayton and Indolakto are managers under the ICBP. In the INDF corporate structure, ICBP is under Bogasari. Before the ICBP was founded, instant noodle production was handled directly by the INDF itself.

Then how big the size of the ICBP? In 1H10, total assets placed under the ICBP was 11.2 trillion, or only 26.6% of total assets INDF amounted to 42.1 trillion. So from here also shows that the main business of INDF is not in instant noodles, but cooking oil.

What about the performance of ICBP?

Because the products of Indomie, milk, and chiki are always in demand of the market, the ICBP performance is fairly good. In 1H10, ICBP reported sales of 8.9 trillion, or 49.2% of total sales of INDF. Its ne profit recorded 800 billion, or 56.7% of total net profit of INDF. For a company with the size of asset only a quarter of its parent company, then the revenue contribution by more than half of the total income of the parent, are remarkable. Thanks to the price of Indomie which never fell. In contrast to the world price of CPO that often fluctuating, which led to INDF revenue from cooking oil business sometimes higher, sometimes dropped.

The problem is, INDF as a parent company of ICBP has quite a lot of debts. In 1H10, the total liabilities of INDF recorded Rp 25.8 trillion, or 2.5 times of the equity which only 10.7 trillion. Well, from the total debts, 8.9 trillion aka 34.5% were placed in the ICBP. So from ICBP total assets amounted to 11.2 trillion, most are debts. ICBP equity is recorded 1.9 trillion, or only 17.9% of the total equity of INDF. So it seems that ICBP was established only as a place to accommodate the debts of its parent company, INDF.

And indeed it is reflected by the purpose of the IPO, where 70 - 80% of the proceeds from the IPO will be used to pay debts. Thus, the IPO of ICBP will make the financial balance of its parent company, INDF, be healthier, because the debts would reduced. But then what about the ICBP itself? In general, the IPO is certainly not going to have a significant influence for the performance of ICBP, because only 20 - 30% of the IPO proceeds will be used for capital expenditure. But as heICBP performance from the beginning is already good (thanks to the Indomie), then ICBP still have bright prospects for the future.

Salim Group as the INDF owner INDF, is known as conservative business group, aka prefer to do business in the real sector rather than playing with investor funds in the market (quite different from Bakrie Group). So it was somewhat questionable, why now they use IPO in finding money to pay debts. By the way in the financial world, the IPO is the most delicious way to looking for fresh funds, because these funds do not need to be returned to the owners (investors). In contrast to the issuance of bonds or loan from banks.

But on the bright side, now the fans of Indomie are no longer need to invest their money to INDF , but could directly into ICBP. We could say, INDF performance is good enough because it is underpinned by its instant noodle products. So if now ICBP is set to become a specialized company of instant noodle, then the investors could transfer their funds from INDF into ICBP. INDF performance can be easily affected by the global prices of CPO, but the ICBP performance certainly will almost continue to soar, even though the parents forbid their children not to eat Indomie too much (I remember when I was a child, haha).

The IPO price reached 4.300 to 5.500, fair enough?

Well, if viewed from here, INDF as the parent company of ICBP is outrageous. With the lowest price lowest, 4.300, then the market cap of ICBP is 25.1 trillion, aka 2.2 times of the total assets of ICBP. That's expensive! Moreover, most of ICBP assets are debts. It seems that the securities who taking care of the IPO are too confident with the prospect of ICBP, which is actually good, or maybe they are too impose to get funds Rp 5.0 to 6.4 trillion from the public. But if the price is that expensive, then ICBP stock might be a bit difficult to rose sharply on its first trading days, because from the beginning it is already high.

What about the fundamental valuation fundamental? Because ICBP record huge net profits, then the price 4.300 will print annualized PER 7.15 times. Reasonable? yes, although it is still expensive for the size of newcomers stock. Well, what about its PBV? Because ICBP equity are very small, then the price of 4.300 reflected PBV 13.0 times, certainly high enough, so the price of 4.300 is indeed quite expensive, especially 5.500.

In the future, ICBP may be an option for long term investing. But if ICBP still want to sell its shares at a price of 4.300, then maybe you should wait and see. Unlike the case if the price is at levels of 3.000, just take it!

Indofood CBP
Performance rating in 1H10: AA
Shares rating at 4.300: BBB