AKR Corporindo (target price Rp3,600)

New catalysts to bolster growth

Indicated revenue growth of 52% YoY
Management indicated revenue hit Rp18.6t in FY11 (growth of 52% YoY), in line with our estimate. Higher revenue was supported by all divisions, especially petroleum distribution, which was up 96% YoY to Rp14.6t. Management is targeting revenue growth of 34% YoY to Rp24.97t this year, above our expectations. We foresee that petroleum distribution will remain the main growth driver this year.

Awaiting new catalysts to bolster growth
There are new catalysts that will bolster AKR’s revenue and profit this year, as follows: i) implementation of restrictions on the use of subsidised fuel for private cars in Jawa-Bali from 1 April 2012, which will create opportunities for expansion of AKR’s retail distribution arm, and is positive for AKR’s Jakarta tanks terminal (JTT) operations; and ii) penetration of the eastern Indonesian market for oil distribution. Last year, Papua contributed 12% to AKR’s petroleum revenue. iii) We are also monitoring progress of AKR’s coal exploration in central Kalimantan, and coal infrastructure development this year. Realisation of these catalysts will boost growth.

Changes in assumptions
We upgrade our FY12 revenue estimates by 6% to Rp22.8t as we raise our ASP assumption for petroleum distribution to Rp7,000 per litre (from Rp6,500 per litre), but we downgrade our revenue forecast for the coal business by 28% to Rp630b (from Rp870b) as we lower coal sales volume assumptions to 1m MT amid concerns on potential transportation difficulties. We also increase our barging cost assumption to US$27 per MT from US$22 per MT.

Maintain TP at Rp3,600; HOLD
We maintain our TP at Rp3,600 (pegging the stock at 18.6x 2012 PER), despite the changes in our assumptions for petroleum distribution ASPs and coal sales volumes. As the stock’s current price is approaching our TP, we downgrade the stock from BUY to HOLD.

Strong FY11 revenue indication
Management indicated the company will achieve revenue of Rp18.6t in FY11 (growth of 52% YoY), in line with our estimate. Higher revenue was supported by growth in all divisions, especially petroleum distribution. Revenue in this segment was up 96% YoY to Rp14.6t, supported by strong sales volume growth of 48% YoY to 2m KL, while ASP rose 32% YoY to Rp7,300 per litre. In the chemical division, AKR booked revenue growth of 31% YoY to Rp2.5t, supported by sales volume growth of 8% YoY to 1.22mt, with ASP up 41% YoY to Rp2,400 per kg. In its manufacturing businesses, Aruki booked revenue growth of 53% YoY to Rp366b, while Khalista’s revenues rose 52% YoY to Rp439b.

Petroleum distribution remains the key revenue growth
driver this year
We expect revenues to still be driven by petroleum distribution. We maintain our sales volume growth assumption for the petroleum distribution business of 29% YoY to 2.57m KL (in line with management’s target of 2.5m KL). We are waiting for the realization of new catalysts to bolster sales volume growth in the petroleum business this year as follows:
1) Penetration of the eastern Indonesia market. According to management, the market for petroleum distribution in east Indonesia has huge potential for growth, as there are many metal and mining companies in the area. Last year, Papua contributed 12% to AKR’s petroleum revenue. To support market penetration of eastern Indonesia, AKR is constructing petroleum storage tanks in Bitung, North Sulawesi.
2) Maintaining petroleum business expansion in Kalimantan, the biggest contributor to AKR’s petroleum revenue (59%). Almost all of AKR’s clients in Kalimantan comprise coal mining companies. AKR is constructing new petroleum storage tanks in several areas in Kalimantan, such as Buntok Baru (Central Kalimantan), Teluk Timbau (South Kalimantan), and Palaran (East Kalimantan). This year, AKR will continue construction of new storage tanks with total capacity of 76,900 KL (including 3 new chemical storage tanks in Surabaya) with capital expenditure allocation of Rp783b.
3) The implementation of restrictions on the use of subsidised fuel this year. The government plans to impose the policy of prohibiting private cars from consuming subsidised fuel in Jawa-Bali from 1 April 2012, in an effort to reduce mounting subsidies to save the state budget amid soaring global oil prices. The restrictions will be implemented in Sumatera and Kalimantan in 2013, and in Eastern Indonesia in 2014. The limitation of subsidised fuel has been mandated in the 2012 Indonesia state budget. The quota is reduced to 37.5m KL (from 40.45m KL in 2011), with the budget for subsidised fuel now at Rp123.6t. Fuel subsidies jumped by 80% YoY to Rp165t in 2011 due to soaring oil prices, while subsidised fuel consumption exceeded 3.1% to 41.69m KL vs. the quota of 40.45m KL. The limitation of subsidised fuel this year will be an opportunity for AKR to further expand its retail distribution business, and is positive for its Jakarta tanks terminal (JTT) operation. AKR will potentially open petrol stations of non-subsidised fuel in Jawa-Bali. Currently, AKR has terminal tanks with a capacity of 250,000 KL in Jakarta, and storage tanks with capacity of 10,000 KL in Bali. Meanwhile, AKR is ready to open non-subsidised fuel petrol stations outside Jawa-Bali if implementation of the limitation is extended to these areas. Currently, AKR owns 31 petrol stations (17 in Sumatera, 14 in Kalimantan), which only sell subsidised fuel.

Increasing ASP assumption of petroleum distribution
We raise our ASP assumption of petroleum distribution this year to Rp7,000 per litre from Rp6,500 per litre, as we believe oil prices will remain high. Average NYMEX crude oil prices stayed at an elevated US$95 per barrel in 2011 (up 19% YoY from an average price of US$79.6 per barrel in 2010), despite the global economic turmoil. Currently, crude prices are already above the psychological US$100 per barrel level, at US$102.6 per barrel. However, we conservatively maintain our assumption of ASP for the petroleum distribution at an average of Rp6,500 per litre over FY13-16.

Awaiting coal mining & coal infrastructure development
We are monitoring the progress of AKR’s coal exploration in central Kalimantan, and coal infrastructure development this year. AKR started exploration for coal at its mines in 4Q11. Management said the first coal shipment of 7,000 MT took place in December 2011, with a selling price of US$76 per MT. Management is targeting coal sales volumes of 1m MT this year, rising to 5m MT by FY15. AKR is also starting construction of coal infrastructure with a coal hauling road development 51 km long from its coal mine to its Buntok Baru Coal Terminal, and construction of a mid-sized coal terminal in Teluk Timbau, approximately 213 km from Buntok Baru Terminal. AKR also plans to increase its stake in Jabal Nor, a company engaging coal infrastructure which operates a 28-km coal hauling road and coal terminal in Tapin, South Kalimantan, from 33.4% to over 50% this year, after which it will construct the hauling road. AKR claims margins in coal infrastructure are lucrative, with gross margins of hauling roads at 50-55%. We have factored in revenue from AKR’s coal mining business in our estimates. However, we are concerned about transportation risks at AKR’s coal mine. Coal mining in Central Kalimantan is more difficult than in East Kalimantan. AKR’s coal mine in Central Kalimantan is a distant 500 km from the coast, compared to its mines in East Kalimantan which are far closer to the coast. This means that in order to expand coal exploration and production, AKR will need a longer time to transport heavy equipment and trucks to its East Kalimantan mines. AKR will also need more time to deliver coal to customers. In fact, AKR is expecting to export its coal China this year.

Changes in FY12 coal business estimates
As we are concerned with transportation risks of AKR’s coal mine, we reduce our coal sales volume assumption this year to 1m MT from 1.5m MT, but maintain sales volume estimates of 3.4m MT in FY15. Our sales volume target is still below management’s target of 5m MT in FY15. Therefore we downgrade our estimate of AKR’s coal business revenue by 28%, to 630b from Rp870b in FY12. We are also concerned about barging costs for AKR’s coal mines. AKR is facing greater competition for barging services from other coal mines in central Kalimantan, which would increase barging costs. According to management, barging cost accounts for 50% of AKR’s total coal production costs, while 30% comes from mining cost. We raise our barging cost from US$22 per MT to US$27 per MT, thereby raising our estimate of cash cost of production to US$54 per MT from US$49 per MT.

Allocating capital expenditure of Rp1.37t in FY12
Management is allocating capital expenditure of Rp1.37t this year to finance construction of several new storage tanks with a capacity of 76,900 KL, along with logistics facilities (trucks, a tanker, an oil barge and a jetty), coal infrastructure, and maintainance capex for Aruki and
JTT, Guigang Port. Management’s FY12 capital expenditure target is above our expectation of Rp710b, as we have not factored in capital expenditure for logistics facilities and port equipment in Surabaya, a tanker, SPOB, an oil barge and trucks and storage tanks for chemicals. We believe the capital expenditure will be financed by internally-generated cash. We expect cash on hand at end-FY11 was still above Rp1t; our FY12 EBITDA estimate is approximately Rp1.2t.

Maintain TP at Rp3,600; HOLD
We maintain our TP at Rp3,600 (pegging the stock at 18.6x 2012 PER), despite the change to our estimates in petroleum distribution ASPs, and assumptions in the coal mining business. As the stock’s current price is close to our TP, we recommend HOLD on this counter, from BUY
previously.


source: KIM ENG dated 11 January 2012