buy akr corporindo (akra ij) - danareksa online

www.danareksa.com See important disclosure at the back of this report 1

Equity Research Initiation Report

Wednesday,12 August 2020

AKR Corporindo (AKRA IJ) BUY

Initiate Continuing strong growth with a cheap valuation

We initiate coverage on AKRA, a fuel and chemical logistics company, with a BUY call, noting that the business model can provide stability amid oil price volatility. Furthermore, backed by strong yoy performance, AKRA has been able to book solid 1H gross profits in the past three years despite the implementation of social distancing restrictions this year. We foresee recovery momentum for AKRA in 2H20 as social distancing restrictions have been eased. We initiate coverage with a BUY call and TP of IDR 3,700. Stable business model despite the oil price decline. ~73% of AKRA’s revenues come from fuel distribution which is mostly to the mining and manufacturing sectors using cost plus IDR/L. This enables AKRA to maintain its gross profits which leads to stable earnings despite oil price volatility. As such, sales volume is vital. In several quarters, the gross margins of this business showed an improvement despite oil price increases. Furthermore, AKRA has just obtained an additional FAME allocation from the government which places AKRA as the private company with the largest FAME allotment. Initiatives to tap underserved markets. AKRA also aims to tap retail and aviation fuel businesses which remain as underserved markets in Indonesia. This initiative is also an expansionary move which uses AKRA’s current infrastructure that has been improved over the last 60 years. Furthermore, AKRA is also expanding into industrial estates, via JIIPE. This is believed to be the most integrated industrial estate in Indonesia. One of the anchor clients is Freeport which is currently building a smelter. Backed by a healthy balance sheet. AKRA’s debt to equity ratio reached 0.81x in 1H20. Adapting to Covid-19, AKRA maintained its receivables and payables at a minimum level to ensure the flexibility of its business during the pandemic. Most of its assets are dominated by industrial estates land inventory. BUY with a TP of IDR 3,700. We expect 2H20 to be a turning point for AKRA as social distancing restrictions have been eased. This may drive recovery in the mining and manufacturing sectors. Using DCF with WACC of 10.9% we initiate coverage on AKRA with a BUY recommendation and TP of IDR 3,700 implying FY21 PE of 12.4x

Last price (IDR) 2,870

Target Price (IDR) 3,700

Upside/Downside +28.9%

Stock Statistics

Sector Trade

Bloomberg Ticker AKRA IJ

No of Shrs (mn) 4,015

Mkt. Cap (IDRbn/USDmn) 11,522/785

Avg. daily T/O (IDRbn/USDmn) 40.3/2.7

Major shareholders (%)

Arthakencana Rayatama 59.6

Public 40.4

EPS Consensus (IDR)

2020F 2021F 2022F

Danareksa 248.5 298.9 301.7

Consensus 198.1 228.7 248.5

Danareksa/Cons 25.5 30.7 21.4

AKRA relative to JCI Index

Source : Bloomberg

x Ignatius Teguh Prayoga

(62-21) 5091 4100 ext. 3511

[email protected]

Key Financials Year to 31 Dec 2018A 2019A 2020F 2021F 2022F

Revenue (IDRbn) 23,548 21,703 20,367 22,527 26,071 EBITDA (IDRbn) 1,228 1,422 1,710 1,929 1,981 EBITDA Growth (%) (17.1) 15.8 20.2 12.8 2.7 Net profit (IDRbn) 1,645 717 998 1,200 1,211 EPS (IDR) 409.7 178.6 248.5 298.9 301.7 EPS growth (%) 36.6 (56.4) 39.1 20.3 1.0 BVPS (IDR) 2,085.1 2,076.4 2,224.8 2,348.7 2,473.8 DPS (IDR) 239.9 109.8 145.5 175.0 176.6 PER (x) 7.0 16.1 11.5 9.6 9.5 PBV (x) 1.4 1.4 1.3 1.2 1.2 Dividend yield (%) 8.4 3.8 5.1 6.1 6.2 EV/EBITDA (x) 11.1 10.0 7.6 6.4 5.9

Source : AKRA, Danareksa Estimates


The Trading and Distribution Company Built on Solid Foundations AKRA mainly operates in the trading and distribution business that transports industrial diesel and chemical substances to the industrial sector in Indonesia. AKRA started its business in 1960 as a supplier of chemicals. AKRA has the largest FAME allocation compared to other private companies with state owned Pertamina being the number one FAME distributor. AKRA’s logistics and distribution business contributes around ~71% of its total revenues. AKRA is now expanding into the retail business through a Joint Venture with British Petroleum (BP) and the industrial estate business with Pelindo III. This expansion strategy should provide AKRA with a more stable revenues stream from fuel sales from the retail business and recurring income from industrial estate facilities (power plants, water treatment, etc.) and additional revenues from land sales.

Exhibit 1. Revenue Breakdown Exhibit 2. Margins per segment

Source: Company, Danareksa Sekuritas estimates Source: Company, Danareksa Sekuritas estimates

Strategy – Expanding to tap the retail market and industrial estates Over the years, AKRA has distributed industrial fuel and chemical products to manufacturing, mining and industrial companies. These activities form the backbone of the company’s revenues. This business has been supported by the infrastructure which AKRA owns such as Tank Terminals, sea and river ports, vessels, warehouses, and trucks. The tank terminal infrastructure is hard to replicate as land near to harbors is limited. Furthermore, the tank storage facility needs to be built close to the harbor to ensure operational efficiency. Thus, AKRA sees opportunities to expand into other businesses by leveraging its infrastructure. AKRA plans to expand its business through a partnership with BP tapping the retail fuel market, and the aviation and oil lubricant market. AKRA views that Indonesia’s retail fuel market is still underserved compared to other regional countries, while the aviation fuel market is still dominated by Pertamina and avtur is expensive in the eastern part of Indonesia. By using its existing infrastructure and considering the rising demand for fuel, AKRA believes it can seize opportunities by expanding its ecosystem into retail and other businesses.

22,468.33

19,764.82

15,212.59

18,287.94

23,548.14

-

5,000.00

10,000.00

15,000.00

20,000.00

25,000.00

2014 2015 2016 2017 2018

IDR

bn

Petroleum Basic chemicals and others

Manufacturing - Third parties Logistic services

Industrial estate and others Coal Mining and trading

0%

10%

20%

30%

40%

50%

60%

70%

2016 2017 2018 2019

Petrol Chemicals Manufacturing

Logistics services Industrial estate


AKRA is also tapping the industrial estates business through a partnership with Pelindo III, Java Integrated Industrial and Port Estate (JIIPE), to expand its recurring income stream. The total land is around 1,761 HA dedicated for industrial estates and designed to be the most integrated industrial estate in Indonesia. Currently, there are several tenants, one of which is Freeport. Freeport plans to build a smelter in the area via a long-term lease with the option to purchase. Other than land sales and lease income, AKRA plans to obtain a stable revenues stream from utility revenues that support JIIPE. Finally, for the main business, AKRA will still rely on industrial fuel and chemical product sales. This business provides a stable revenues stream as AKRA acts as the logistics distributor. For industrial fuel distribution, AKRA takes a margin in Rupiah per liter, which enables AKRA to withstand fuel price volatility. Thus, fuel sales volume is paramount. Meanwhile, the chemicals business is using margins per ASP. The revenues are impacted when petrochemical prices are volatile. As the industrial fuel business provides the largest revenues stream for AKRA, this business model provides stable revenues even when fuel prices are volatile

Exhibit 3. AKRA’s Business

Source: Company, Danareksa Sekuritas


The Fuel and Chemicals Distribution Business is built on solid foundations AKRA commenced its petroleum distribution business in 2005. This business line has been AKRA’s biggest revenues contributor and accounted for ~73% of total revenues in FY19. AKRA distributes subsidized diesel fuel and non-subsidized diesel fuel to industrial sectors. AKRA sells its industrial diesel products to the mining sector (in a 53% proportion), general (industrial) markets (44%) with a small portion sold to the power sector and major customers in 2019. Furthermore, almost 50% of sales to the mining sector are made to coal mining companies. AKRA is the second-largest player in petroleum distribution (with Pertamina being the largest) with around 3% market share. The total market size is 74mn KL.

Exhibit 4. AKRA Industrial Fuel distribution Exhibit 5. Industrial fuel business compared to AKRA

Source: Company Source: MEMR, Company

In this business, AKRA has no trading position as it only acts as the transporter to its clients. All MOPS prices including any forex exchange exposure is passed on to customers, leaving AKRA with logistics costs and margins. For industrial diesel pricing, there is no government regulation with prices solely determined by the market. Furthermore, the inventory is always gauged on a daily net open position to ensure all inventory has been delivered to clients and the company has zero trading exposure.

Exhibit 6. Pricing mechanism – Order from customers Exhibit 7. Pricing mechanism – Pricing to customers

Source: Company, Danareksa Sekuritas Source: Company, Danareksa Sekuritas

1.52

2.02 1.9

1.79 1.92

2.03

0.00

0.50

1.00

1.50

2.00

2.50

2014 2015 2016 2017 2018 2019

Mn

KL

Mining Major customers Power sectors General market

15.2 14.3

20.5

2.1 2.0 2.2

-

5.0

10.0

15.0

20.0

25.0

2016 2017 2018

Mn

KL

National industrial fuel sales AKRA industrial fuel sales


With this business model, AKRA’s gross profits from this segment can withstand volatile fuel prices as seen recently. Interestingly, the margins of AKRA improved when the price of fuel is low. We think that this reflects two possibilities. Firstly, AKRA can obtain low prices from fuel suppliers due to oversupply or because clients are purchasing more fuel due to low prices. Furthermore, it is evident that AKRA’s gross profit qoq growth is less volatile than the revenues qoq growth. Given this backdrop, we conclude that AKRA’s earnings are more exposed to the volume sold rather than ASP.

Exhibit 8. Quarterly Sales Volume and ASP Exhibit 9. Diesel MOPS price and Petrol gross margins


*Assuming GPM chemical 6.5%


Exhibit 10. Quarterly revemue and gross proft growth Exhibit 11. Quarterly Gross profit and Sales Volume


*Assuming GPM chemical 6.5%


For the industrial segment, AKRA obtained a 725,000 KL FAME allocation from the government, placing AKRA as the second largest FAME recipient, after Pertamina, making it the largest private company selling B30 in Indonesia. The company’s allocation was increased by the government in mid-2020 due to AKRA’s solid performance in distributing B30. In 2019, AKRA absorbed more than 95% of its allocation. As a result, the government increased the company’s FAME allocation by 45% from its initial allocation which is equivalent to 2.4 Mn KL of B30 ready to be sold in the market. Supported by strong infrastructure across Indonesia. AKRA has improved and accumulated logistics infrastructure assets since the 1960’s. AKRA is currently supported by 9 seaports, 6 river ports, 12 vessels, 24 warehouses, more than 350 trucks and 4 storage terminal storage tanks with a total capacity of 836,000 KL. The capacity of the largest terminal storage tank, Jakarta Tank Terminal (a JV with Royal Vopak), was recently increased by 40% to 350,000KL in 2019. This has improved the logistics in the western part of Java, Indonesia’s

-

100

200

300

400

500

600

700

800

-

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

10,000

00

0 K

L

IDR

/L

Volume sales ASP

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

0

10

20

30

40

50

60

70

80

90

100

%

USD

/Bb

l

MOPS HSD Petroleum gross margins (interpolated)

-60%

-40%

-20%

0%

20%

40%

60%

-

1,000.00

2,000.00

3,000.00

4,000.00

5,000.00

6,000.00

2Q

17

3Q

17

4Q

17

1Q

18

2Q

18

3Q

18

4Q

18

1Q

19

2Q

19

3Q

19

4Q

19

1Q

20

2Q

20

qo

q g

row

th (%

)

IDR

bn

Petroleum Revenue Petroleum gross profit

Rev. growth (qoq%) GP growth (qoq%)

-

100.00

200.00

300.00

400.00

500.00

600.00

700.00

800.00

- 50.00

100.00 150.00 200.00 250.00 300.00 350.00 400.00 450.00 500.00

2Q

17

3Q

17

4Q

17

1Q

18

2Q

18

3Q

18

4Q

18

1Q

19

2Q

19

3Q

19

4Q

19

1Q

20

2Q

20

00

0 K

L

IDR

bn

Petroleum gross profit Volume sales


most populous island. We think that this infrastructure provides a competitive advantage for AKRA as it is hard to replicate. As such, AKRA is well placed to become the strongest private player in the industrial and retail fuel distribution business.

Exhibit 12. AKRA’s logistics infrastructure across Indonesia


Exhibit 13. AKRA Storage Capacity Exhibit 14. Jakarta Tank Terminal


0

100

200

300

400

500

600

700

800

900

2004 2009 2012 2014 2016 2018 2019

00

0 K

L


Looking to tap the largest fuel market in Indonesia – The Retail Fuel market Expanding into underserved markets – Retail Fuel, aviation fuel and the lubricants Business. The fuel market of Indonesia is large considering the sizable population and it has grown over the years. However, most fuel distribution is still handled by Pertamina. Few attempts have been made by foreign companies such as Petronas, Shell and Total to penetrate this business. Petronas has not succeeded in Indonesia’s retail fuel market mainly because of a lack of storage infrastructure and low economies of scale. By comparison, Shell successfully set foot in Indonesia supported by JTT storage which is owned by AKRA. As the company with strong infrastructure and lengthy experience in logistics and distribution, AKRA seized the opportunity to establish a joint venture with BP.

Exhibit 15. AKRA and BP Joint Venture


Eyeing underserved markets. AKRA is looking to set foot in the retail fuel market under PT Aneka Petroindo Raya. AKRA wants to seize opportunities arising from the fuel shift from low octane fuel to high octane fuel. This JV aims to expand in Indonesia’s major cities, starting with Jakarta, Bandung and Surabaya. In the next phase BP may place its gas stations in several rest areas along the Trans Java toll road. We think this is an opportune time to expand its retail fuel business given the steady completion of large-sized infrastructure projects in Indonesia.

Exhibit 16. Indonesia’s gas stations number is still low.. Exhibit 17. ..which is very underserved compared to regional peers

Source: Statista, 2018 Source: Statista, 2018

0

5,000

10,000

15,000

20,000

25,000

30,000

Thailand Indonesia Philipines Malaysia

Gas

Sta

tio

n n

um

ber

380

117

67

28

0

50

100

150

200

250

300

350

400

Thailand Malaysia Philipines Indonesia

Gas

sta

tio

ns/

mill

ion

po

pu

lati

on


Exhibit 18. Shift from low octane fuel to high octane fuel Exhibit 19. Pertamina still dominates

Source: MEMR Handbook, 2018 Source: Pertamina 2018 AR, Danareksa Sekuritas

Exhibit 20. Pricing positioning of BP retail fuel in Aug20 Exhibit 21. Retail fuel price regulation from MEMR

Source: Various sources Source: MEMR, No. 62 K/12/MEM/2020

Expansion affected by the pandemic. AKRA is aiming to have ~10KL of fuel sales per day per gas station. AKRA also plans to have 150 gas stations in the next 5 years. However, as the covid-19 pandemic still lingers, AKRA has postponed its gas stations expansion plan. Even so, the company is negotiating with several parties to initiate a Dealer Owned and Dealer Operate (DODO) scheme which provides alternatives for expansion with lower capex.

-

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0

2015 2016 2017 2018

Mill

ion

s K

L

Ron88 Ron 90 Ron 92 Ron 95,98,100

7,146

148 101 13 2 -

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

Pertamina AKR Shell Total Vivo

Un

it

Fuel Type (IDR/L) Pertamina BP AKR Shell Total Vivo

Ron 90 7,650 9,075 9,075 9,075 9,075

Ron 92 9,000 9,125 9,125 9,125 9,125

Ron 95 9,850 9,650 9,650 9,650 9,650

Bio solar (CN 48) 9,400 - - - -

Dexlite(CN 51) 9,500 9,525 9,850 9,850 -nf-

Dex (CN53) 10,200 - - - -

Ron 95 below and CN 48

MOPS or ARGUS + IDR 1,800/L + ~10% Margin from base price

RON 95 above and CN 51

MOPS or ARGUS + IDR 1,800/L + ~10% Margin from base price


Differentiating into Aviation fuel and the lubricants businesses Providing better jetfuel pricing in the eastern part of Indonesia. AKRA sees opportunities in a lack of aviation fuel supply in the eastern part of Indonesia, where jetfuel prices are higher. AKRA is eying this opportunity through Dirgantara Petroindo Raya, a JV with BP. We heard that one of the LCC carriers may seek opportunities to do business with DPR as a way to get better fuel pricing in the eastern part of Indonesia. In 2019, BP had already obtained a General Trading License (INU) and operates in Morowali, Central Sulawesi. Starting refueling after social distancing eases. As the covid-19 pandemic hit the nation, DPR started refueling in Jun20 since social distancing was in effect. Furthermore, DPR still sees possible expansion in the near future. However, this expansion is still subject to developments in the pandemic

Exhibit 22. Existing and new airport in Indonesia Exhibit 23. Declining airline passengers due to pandemic

Source: National Medium Term Planning, 2019 Source: BPS

Synergizing the lubricants business with industrial petroleum. AKRA taps the lubricants market through Anugerah Lubrindo Raya (ALR) and looks to provide lubricant products to the marine, industrial, and mining sectors. This business was commenced in 2018 by AKRA and a new company was formed in 2019. Although this business is still at an early stage, ALR may show promising growth in the future given growth in industrial petroleum sales volume.

13

12

9

9

6

8

1

1

4

3

5

1

0 5 10 15

Sumatera

Java

Papua

Kalimantan

Sulawesi

NTT

Existing New

-

500,000

1,000,000

1,500,000

2,000,000

2,500,000

3,000,000

3,500,000

4,000,000

Jan

19

Feb

19

Mar

19

Ap

r19

May

19

Jun

19

Jul1

9A

ug1

9Se

p1

9O

ct19

No

v19

Dec

19

Jan

20

Feb

20

Mar

20

Ap

r20

May

20

Jun

20N

um

ber

of

dep

arti

ng

pas

san

gers


Chemicals – Long-Term Track Record Strong track record. AKRA has a long track record in conducting this business since the 1960s. This business has been a backbone of the company for a long time and pioneered AKRA’s logistics infrastructure development. The chemical segment is divided into two categories; commissioned and trading. This business model involves commissions and distributor fees providing gross margins of around 6-7% of ASP.

Exhibit 24. Chemical pricing mechanism


Mostly consumer related business. AKRA mainly serves industries that require chemical logistics services. These selected products are usually delivered in large volumes to ensure economies of scale. AKRA also ensures that the supply is stable to ensure the continuity of the business. Although the performance of the consumer sector is slowing down, AKRA sees opportunities from the operation of new bauxite/alumina smelters in Kalimantan and Sulawesi and the mandatory use of B30 by industrial players.

Exhibit 25. Distributed products and customers’ business Exhibit 26. Principals of AKRA’s Chemical Business


Products Customers

Caustic Soda

Hydrochloric acid

PVC Resin

Sodium Hypochlorite

Soda Ash

Sodium Sulfate

Methanol

Hydrogen Peroxide

Sulphuric Acid

Rayon

Textiles

Soap and Detergent

Plywood and wood working

Consumer industry

Fertilizers

Smelter


Pressure from global prices and the covid-19 pandemic. The sales volume of chemical products has been stable over time. However, the ASP declined gradually due to global petrochemicals oversupply, as the ASP follows the global benchmark prices. This puts pressure on AKRA’s chemical revenues as well as its gross profits. The quarterly sales volume also declined in 2Q20 by 17.3%qoq due to social distancing. However, we still see volume as the key driver of this business amid pressure on global petrochemical prices as there are opportunities in several developing sectors especially mining and biofuel. Furthermore, with a track record of more than 50 years and strong logistics infrastructure, we believe this segment is able to withstand the current market turmoil.

Exhibit 27. Volume and ASP Exhibit 28. Quarterly Revenue and qoq growth


-

500.0

1,000.0

1,500.0

2,000.0

2,500.0

3,000.0

3,500.0

4,000.0

4,500.0

-

50.0

100.0

150.0

200.0

250.0

300.0

350.0

400.0ID

R/k

g

Mn

T

Quarterly Sales Volume (Mn T) ASP (IDR/Kg)

-30.0%-25.0%-20.0%-15.0%-10.0%-5.0%0.0%5.0%10.0%15.0%20.0%25.0%

-

200.00

400.00

600.00

800.00

1,000.00

1,200.00

1,400.00

1,600.00

qo

q g

row

th

IDR

bn

Quarterly Revenue (IDR bn) QoQ growth (%)


Industrial Estate – Start to Get Traction JIIPE – Integrated Industrial Estates Under BKMS, AKRA has also diversified its business into industrial estates via a partnership with Java Integrated Industrial and Port Estate (JIIPE). This business is in a partnership with Pelindo III, a SOE port company. Through BKMS, AKRA owns 60% of the Industrial estate business and 40% of the port business through BMS. JIIPE is the first industrial estate that integrates a multipurpose port, independent power plant and residential township. JIIPE is intended to be an industrial estates hub that connects Java with the eastern and northern parts of Indonesia. JIIPE is also strategically connected by a direct toll road and railway access. JIIPE is currently recognized as a National Strategic Project (PSN). JIIPE has a total area of around 3,000 HA which is divided into three parts: a 1,761HA industrial estate, 406HA port estate and 766HA residential estate. The development of the industrial estate facility is proceeding via phase two which includes land filling of 265ha and 137ha of reclamation area.

Exhibit 29. JIIPE Area


Exhibit 30. Strategically located at the center of Indonesia.. Exhibit 31. ..connected with integrated port, toll road and railway



Equipped with complete facilities. JIIPE, as an integrated industrial estate, is equipped with various independent facilities provided inside the area which includes power plants, water and waste treatment and a sea water cooling system. It is now powered by a combined cycle power plant with capacity of 23MW. JIIPE has a permit from the government to build a 500MW power plant. The construction plan is still being developed, and this includes the direct price charge to tenants. Supported by the deepest port in East Java. JIIPE will also be supported by a 400HA integrated deep sea port with 6.3km total berth length and depth of 16m LWS. This port can cater up to 100,000 DWT vessels. This port is a multi service port and can serve containers, liquid and bulk cargo, vehicles and general cargo. This port is also able to serve an exclusive jetty, conveyor and a LNG terminal.

Exhibit 32. Deep sea port


Land sales have been showing some traction over recent years. The total land sales of JIIPE have reached 69 HA in the past 5 years including 1H20. In 2018, there were no land sales at all due to the elections as companies restricted investment activities. The cost of land sold stands at around USD 61/m2 which includes acquisition cost, land treatment and upgrade and others. AKRA plans to sell the land at a price of around USD 150/m2, depending on the location. Therefore, we can expect around 50-60% margins.

Exhibit 33. JIIPE Land Sales Exhibit 34. Land Sales Revenue and Gross Profit


9.0

15.0

28.0

-

8.0 9.0

-

5.0

10.0

15.0

20.0

25.0

30.0

2015 2016 2017 2018 2019 1H20

HA

-100.0

0.0

100.0

200.0

300.0

400.0

500.0

600.0

700.0

2015 2016 2017 2018 2019

IDR

bn

Land sales revenue (including utilities revenue) Gross profit


PT Freeport to provide recurring income. PT Freeport is one of JIIPE’s anchor tenants which will operate a smelter facility with land area of 103ha under a long-term lease since May 2019. To support the construction of the smelter, PT Freeport also rents 125ha of land for a laydown area in 2020. The annual rental fee is USD 7.5/sqm/year which applies to the 103ha smelter land and 120HA laydown area and is paid 5 years in advance. The rental fee increases by 12% every 5 years. Freeport will provide recurring income of ~IDR 125.5bn per annum, excluding the laydown area. Furthermore, JIIPE may also benefit from electricity revenues from PT Freeport as it requires a 135MW gas power plant to operate its smelter.

Exhibit 35. Freeport lease land and laydown area Exhibit 36. Other major tenants


Exhibit 37. PT Freeport Smelter Construction Indicative timeline

Date Developments

May 2019 Handover of 103 HA of land for smelter area

2020 Handover of 120-135 HA for laydown area

June 2020 Start construction for power plant and smelter

Mid 2022 First operation for power plant and first line smelter

End 2022 Second operation for power plant and second line smelter

End 2023 Full operation – line 1 & 2 Smelter


Several benefits as a Strategic National Project. As JIIPE is recognized as a Strategic National Project by the Government, JIIPE obtains several benefits: 1) a direct construction license: tenants are able to start construction work while proceeding with the building permit which saves time and accelerate the investment timeline, 2) 3 hour service from BKPM and a one stop service for administration and licensing, and 3) MOF granted payment in USD for JIIPE. Combining the concept of being the hub between Java and the eastern part of Indonesia and being a Strategic National Project, JIIPE has a unique competitive advantage and offers ease of doing business in the eastern part of Java.


Financial analysis – Resilient performance backed up by a healthy balance sheet

Exhibit 38. Revenue of AKRA’s Business Exhibit 39. Revenue Mix


Still relying on petroleum revenues. ~73% of AKRA’s sales come from the petroleum business which includes industrial fuel, subsidized fuel and the retail business. The chemicals business accounts for 21-25% of the total revenues although the portion has declined over the years due to lower ASP. The industrial estates business has provided a minimum contribution to total revenues over recent years. As the revenues are mostly affected by ASP and the business model of AKRA is a pass-through model, we see that the gross profit is a more determining factor for earnings.

Exhibit 40. Gross profit of AKRA’s business Exhibit 41. Gross profit margins


The petroleum business provides stable gross profits. Adopting a passthrough business model by taking fixed margins per liter, AKRA can generate a gross profits margin for its petroleum business ranging from 9-12%. Meanwhile, for its chemicals business, the blended ASP is around 6-7% of its revenue which leads to more volatile gross profits compared to the petroleum business. The logistics service business provides gross profit margins of around 9-16%. Margins from industrial estates are the highest among all its businesses, providing gross profit margins of around 23-58%. However, nominally, the gross profits contribution from industrial estates is still insignificant. We believe leasing from PT Freeport will help to boost industrial estate margins. All in all, earnings from the petroleum and chemical businesses constitute the backbone of the company’s earnings.

15,213

18,288

23,548 21,605

(3,000.00)

2,000.00

7,000.00

12,000.00

17,000.00

22,000.00

27,000.00

2016 2017 2018 2019

IDR

bn

Petroleum Basic chemicals Manufacturing

Logistic services Industrial estates

0%

20%

40%

60%

80%

100%

2016 2017 2018 2019

Petroleum Basic chemicals Manufacturing

Logistic services Industrial estates

(500.00)

-

500.00

1,000.00

1,500.00

2,000.00

2016 2017 2018 2019

IDR

bn



0%

10%

20%

30%

40%

50%

60%

70%

2016 2017 2018 2019




Exhibit 42. Operating profit, Pretax profit and Net profit Exhibit 43. other margins


Margins have started to recover. After the company’s performance was adversely affected by the elections and the temporary shutdown of one of AKRA’s main petroleum clients, the margins started to show an improvement in 2019. This was mainly due to improvements in petroleum sales volume and efficiency initiatives conducted during the election year. Although in 2Q20 the sales volume declined due to production cuts in the mining sector, the gross margins improved due to negotiations with fuel suppliers. In 2018, there was a one off transaction from the divestment of Khalista, a chemical facility, resulting in additional net profits of IDR 868.8bn and the divestment of GGACP, a container port in China, in 2017 resulting in profits from discontinued operations of IDR 303.3bn.

Exhibit 44. Balance sheet components Exhibit 45. Asset components in 2H20


Healthy balance sheet. Overall, AKRA has a healthy capital structure. This is evident in its debt-to-equity ratio which has been below 1.2x in recent years. Liquidity has also been kept at a safe level, ensuring the logistics business runs well. In the first half of the year, for example, AKRA made efforts to significantly reduce its receivables given the covid-19 pandemic despite increasing revenues yoy, whilst reducing its planned capex without delaying developments in JIIPE. Furthermore, financing using debt has also been reduced with the completion of JTT construction. This demonstrates how AKRA has maintained a healthy balance sheet in the middle of the pandemic, by

-

500.00

1,000.00

1,500.00

2,000.00

2016 2017 2018 2019

IDR

bn

Gross profit Operating profit EBITDA

Pretax Profit Core profit Net profit

0%

2%

4%

6%

8%

10%

12%

14%

2016 2017 2018 2019

Gross profit margin Operating profit margin

EBITDA margin Pretax Profit margin

Core profit margin Net profit margin

-

0.20

0.40

0.60

0.80

1.00

1.20

-

5,000.0

10,000.0

15,000.0

20,000.0

25,000.0

2016 2017 2018 2019 1H20

X

IDR

bn

Asset Liabilities Equity D/E ratio

Cash 7%

Receivables 16%

Inventory 4%

Land Inventory

13% Net fixed assets 28%

Land inventory for development

13%

Others 19%


ensuring clients pay sooner thus keeping the risk of unpaid receivables at a minimum.

Exhibit 46. Reducing account receivables.. Exhibit 47. ..as well as account payables


Adjusting its working capital during the pandemic. Amid the pandemic, AKRA is taking precautions should clients face financial problems. AKRA is reducing receivables and ensuring clients pay their bills on time. Furthermore, AKRA also seeks to ensure that payments can be paid earlier to reduce working capital risk. This leads to better working capital as indicated in the quick ratio and current ratio which allows AKRA to have greater maneuverability to deal with unforeseen events.

Exhibit 48. Liquidity ratio Exhibit 49. Activity ratios


Maintaining healthy liquidity ratios. AKRA has maintained its working capital at a healthy level as indicated in its current ratio which has been above 1.0x in recent years. In the past 5 years, AKRA has maintained its quick ratio at an average level of 0.8x to ensure business flexibility. As a logistics company, AKRA needs to ensure that its clients are able to settle their bills at a designated time. This explains why the receivables turnover reached between 5.0-6.9x while the payables turnover stood at between 3.4-5.2x over the last 4 years. This led to healthy cash conversion cycles between 1.0-2.4 days.

1H20 FY19 Change

Not yet due 2,311.76 3,535.97 -35%

1-30 days 180.14 246.89 -27%

31-60 days 56.84 60.34 -6%

>60 days 1,277.34 1,428.90 -11%

VAT collector 8.32 6.56 27%

Allowance for impairment losses (207.09) (209.97) -1%

Net account receivable 3,627.32 5,068.69 -28%

-

0.20

0.40

0.60

0.80

1.00

1.20

1.40

1.60

1.80

2016 2017 2018 2019 2H20

x

Current ratio Quick ratio Cash ratio

-

0.5

1.0

1.5

2.0

2.5

3.0

-

5.0

10.0

15.0

20.0

2016 2017 2018 2019

Day

s

x

Cash conversion cycle Receivable turnover

Inventory turnover Payables turnover


Exhibit 50. Liabilities components Exhibit 51. EBITDA/interest


Loans and bonds – Dominated by operational liabilities Most of AKRA’s liabilities are dominated by short-term bank loans and trade payables which are related to its operational activities. For financing, they only accounted for 58% of its total liabilities in 1H20. The trend of operational debt is significantly lower than in FY19 which ensured adequate working capital during the pandemic which increases the portion of financing liabilities.

Exhibit 52. Long term bank loan breakdown Exhibit 53. Debt covenants summary


Most of the bank loans are used for the company’s operations in fuel and chemicals distribution while the second largest bank loan is used for making improvements to JTT. The other bank loans are used for industrial estates and other logistics operations. AKRA recently redeemed 2017 - A series bonds amounting to IDR 895bn which matured in Jul 20, by obtaining a loans facility from the bank. The debt-to-equity ratio consequently reached 0.37x, a very safe level. We also summarize all of the debt covenants for its bank loans and bonds are still in the safe zone.

0%

20%

40%

60%

80%

-

2,000.0

4,000.0

6,000.0

8,000.0

10,000.0

12,000.0

2016 2017 2018 2019 1H20

IDR

bn

Short-term bank loans Trade payables

Long term bank loans Bonds payables

Others Total liabilities

Operational liabilities Financing liabilities

-

10.0

20.0

30.0

40.0

50.0

60.0

70.0

-

200.0

400.0

600.0

800.0

1,000.0

1,200.0

1,400.0

1,600.0

2016 2017 2018 2019 1H20

x

IDR

bn

Axis Title

EBITDA Interest expense EBITDA/Int. Expense

Company 54%

UEPN 8%

JTT 17%

Andahanesa 11%

ATI 1%

AST 9%

Covenants Current status

Gearing ratio maximum 1.25x 0.81

Debt to EBITDA maximum 3x 2.07

Debt to equity maximum 2x 0.81

EBITDA to interest expense not

less than 2.25x9.1


Exhibit 54. ROA and ROE of AKRA over years


Resilient ROA and ROE. AKRA’s ROA and ROE have been resilient over time even during times of crisis. By adopting effective cost management, AKRA has been able to provide stable ROA and ROE over the past 10 years.

Exhibit 55. Dividend payout ratio of AKRA


Dividend payout policy above 30% makes it more attractive. The resilient and stable performance of AKRA is able to support a stable payout ratio of a minimum 30%, ensuring consistent and attractive returns for shareholders. AKRA has a dividend policy of setting a payout ratio at a minimum level of 30%. Over the past 10 years AKRA managed to distribute dividends with a payout ratio between 34-59%. Underpinned by its resilient business, healthy balance sheet and stable ROE, we think AKRA offers an attractive investment thesis.

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

ROA ROE

0%

10%

20%

30%

40%

50%

60%

70%

80%

0

50

100

150

200

250

300

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

IDR

/sh

are

IDR/shares Payout ratio


2H20 and our view – Agility is key to survive Petroleum – Finding other clients and changing client mix is key Continued strong sales volume from 4Q19 and targeting non mining sectors. In 1H20, sales volume showed positive yoy growth mainly due to improvements that have been seen since 4Q19 despite the covid-19 pandemic. Volume from the mining sector and general market increased by 44.1%yoy and 45.8%yoy respectively. However, the 2Q20 sales volume is lower compared to the previous quarter due to the impact of the pandemic and seasonality. Interestingly, despite social distancing that slowed down the manufacturing and mining sectors, AKRA was still able to book quarterly sales volume above the 5 year 2Q average. To adapt to declining coal production, AKRA plans to tap metal mining companies which mine nickel, gold and copper. We expect this plan to work considering that the recovery of hard commodity prices may stimulate mining activity

Exhibit 56. Coal price Exhibit 57. Nickel Price

Source: Bloomberg Source: Bloomberg

Exhibit 58. Gold Price Exhibit 59. Copper Price


Service quality is key. In terms of growth, AKRA’s revenues depend on the industrial environment. However, as depicted in Exhibit 5, the industrial fuel market is still huge and solely supplied by Pertamina. Therefore, service quality and relationships will be key to better volumes.

40

50

60

70

80

90

100

110

120

130

Jan-14 Sep-14May-15Jan-16 Sep-16May-17Jan-18 Sep-18May-19Jan-20

Daily PriceUSD/ton


The new normal may lift sales volume in 1H20. AKRA is also aiming to add significant sales volume from the manufacturing sector in 3Q20. We think this may be possible as manufacturing companies are becoming well adapted to the so-called new normal which should lead to greater productivity. With the government’s new FAME allocation of 725,000 KL, we believe AKRA can achieve its 2020 sales volume target of 2.3mn KL in FY20 as demand may pick up in 3Q20 resulting in higher industrial fuel sales. Retail fuel sales – recent sales have picked up. Jun20’s retail sales volume reached 70% of the sales volume in Feb20 before the government’s social distancing restrictions were enforced. The sales of retail fuel plummeted by ~50% as transportation traffic declined. However, as the current traffic has been improving due to the easing of social distancing restrictions, sales have been picking up since May20. As the traffic improves, we believe the volume sales will start to recover. Retail fuel sales – looking at expansion alternatives. This year, AKRA plans to postpone its expansion plans for a while, awaiting clarity on the course of the pandemic. However, AKRA is also attempting to initiate a Dealer Owned Dealer Operate scheme with several potential partners. We think this may accelerate the rollout of BP gas stations in the future with lower capex than under the Company Owned Company Operate scheme.

Exhibit 60. Toll road traffic shows improvement Exhibit 61. Retail Fuel Sales starts to pick up

Source: JSMR, Danareksa Sekurtas Source: Company, Danareksa Sekurtas

Our forecast – the worst is behind us. The 2Q20 performance is likely to be the worst this year as manufacturing and mining activities slowed down significantly. Nonetheless, sales volume should still be better than in 2019. Furthermore, the operations of the manufacturing and mining sectors were not completely shut down in 2Q20. Looking forward, sales volume should be higher in the following two quarters. For 2H20, we expect the sales volume to increase, resulting in sales volume of 2.33mn L in FY20 with better margins of IDR 674/L. Expecting stellar performance in FY21. As attempts to find the covid-19 vaccine are expected to succeed in mid-2021 and people have adapted well to the new normal, we think that 2021 will be the turning point for AKRA. For the mining companies under our coverage, we expect the EBITDA growth to lie between 4.5-37.0%yoy. As such, it might be advantageous for AKRA to supply more fuel to mining companies. If AKRA can successfully increase its exposure


to non-mining customers as targeted in 2H20, then the FY21 sales volume should improve. Given this backdrop, we expect the sales volume in 2021 to grow by 14.6%yoy to 2.56mn L with flat margins of IDR 672/L.

Exhibit 62. 2Q20 results highest 2Q sales volume in four years Exhibit 63. Margin per liter starts to pickup


Chemicals - 1H20 hit by both lower ASP and volume. In 1H20, the revenues of AKRA’s chemical business fell by 2%yoy or 25.6% on a qoq basis mainly due to the social distancing restrictions. Volume and ASP declined by 17.3%qoq and 9.9%qoq, respectively. The drop in the ASP mirrored the fall in global oil prices. Despite this, however, AKRA still sees possible growth in smelters and the palm oil sector. Relying on the easing of social distancing restrictions and oil price recovery. We think that 2Q20 will see the lowest sales volume this year as the social distancing restrictions have been eased. ASP may also recover as the global oil price has risen to ~USD 40/bbl. We expect the volume sales to reach 1,278 Mn T, or -7.9%yoy with ASP of IDR 2,800/kg for FY20. For FY21, we expect better traction with 12% higher sales volume of 1,431 Mn T supported by the development of smelters, palm oil and general industries. We conservatively ballpark chemicals ASP in 2021 at 2019’s level of IDR 3,200/kg

Exhibit 64. ASP and Volume Exhibit 65. Margin per liter


0

100

200

300

400

500

600

700

800

1Q

16

2Q

16

3Q

16

4Q

16

1Q

17

2Q

17

3Q

17

4Q

17

1Q

18

2Q

18

3Q

18

4Q

18

1Q

19

2Q

19

3Q

19

4Q

19

1Q

20

2Q

20 -

100.0

200.0

300.0

400.0

500.0

600.0

700.0

800.0

900.0

1,000.0

1Q

16

2Q

16

3Q

16

4Q

16

1Q

17

2Q

17

3Q

17

4Q

17

1Q

18

2Q

18

3Q

18

4Q

18

1Q

19

2Q

19

3Q

19

4Q

19

1Q

20

2Q

20

IDR

/L

-

500.0

1,000.0

1,500.0

2,000.0

2,500.0

3,000.0

3,500.0

4,000.0

4,500.0

-

50.0

100.0

150.0

200.0

250.0

300.0

350.0

400.0

IDR

/kg

Mn

T

Quarterly Sales Volume (Mn T) ASP (IDR/Kg)

-30.0%-25.0%-20.0%-15.0%-10.0%-5.0%0.0%5.0%10.0%15.0%20.0%25.0%

-

200.00

400.00

600.00

800.00

1,000.00

1,200.00

1,400.00

1,600.00

qo

q g

row

th

IDR

bn

Quarterly Revenue (IDR bn) QoQ growth (%)


Industrial estates – The Omnibus Law might be the catalyst amid the pandemic Land sales reached 8.9HA in 1H20 depicting an improvement on a yoy basis despite the pandemic. The management still expects new land sales of 10-15 HA in 3Q20. We expect that the Omnibus Law - which is favorable for investors - should provide some traction to industrial land sales. We also incorporate the full year rental revenues from PT Freeport coming from total land rent of 228HA in our model. Considering the global economic turmoil, we expect land sales to only reach 15HA. AKRA expects to record 30ha of land sales per year onwards. However, we use 20HA per year in our model as we take a more conservative approach in setting our land sales estimates which will also be incorporated in our FY21 forecasts.

Exhibit 66. JIIPE Land Sales Exhibit 67. Land Sales Revenue and Gross Profit


Exhibit 68. Danareksa Sekuritas forecasts


9.0

15.0

28.0

-

8.0 9.0

-

5.0

10.0

15.0

20.0

25.0

30.0

2015 2016 2017 2018 2019 1H20

HA

-100.0

0.0

100.0

200.0

300.0

400.0

500.0

600.0

700.0

2015 2016 2017 2018 2019

IDR

bn

Land sales revenue (including utilities revenue) Gross profit


Undemanding valuation with possible continuation of the uptrend in 2H20 Given our assumptions above, we initiate coverage on AKRA with a BUY recommendation and target price of IDR3,700 based on DCF approach with WACC of 10.9% and terminal growth of 3.0%. Currently, AKRA is trading at a cheap valuation below +1 standard deviation of both the PE and EV/EBITDA bands for a three- and five-years period. We foresee continuation in the uptrend as we expect the company to obtain better sales volume in 2H20 for both the petroleum and chemical business as social distancing restrictions have been eased. The main risks to our call include: 1) extended and more stringent social distancing, 2) declining non-coal commodity prices, 3) supply disruption, 4) logistics accidents and 5) restrictions on fuel imports

Exhibit 69. 3 year PE Band Exhibit 70. 5 year PE Band


Exhibit 71. 3 year EV/EBITDA Band Exhibit 72. 5 year EV/EBITDA Band


0

5

10

15

20

25

30

35

Au

g-17

Oct

-17

Dec

-17

Feb

-18

Ap

r-18

Jun

-18

Au

g-18

Oct

-18

Dec

-18

Feb

-19

Ap

r-19

Jun

-19

Au

g-19

Oct

-19

Dec

-19

Feb

-20

Ap

r-20

Jun

-20

Au

g-20

P/E -2std -1std

mean +1std +2std

0

5

10

15

20

25

30

35

Au

g-15

No

v-15

Feb

-16

May

-16

Au

g-16

No

v-16

Feb

-17

May

-17

Au

g-17

No

v-17

Feb

-18

May

-18

Au

g-18

No

v-18

Feb

-19

May

-19

Au

g-19

No

v-19

Feb

-20

May

-20

Au

g-20

P/E -2std -1std

mean +1std +2std

0

5

10

15

20

25

30

Au

g-17

Oct

-17

Dec

-17

Feb

-18

Ap

r-18

Jun

-18

Au

g-18

Oct

-18

Dec

-18

Feb

-19

Ap

r-19

Jun

-19

Au

g-19

Oct

-19

Dec

-19

Feb

-20

Ap

r-20

Jun

-20

Au

g-20

EV/EBITDA -2std -1std

mean +1std +2std

0

5

10

15

20

25

30

Au

g-1

5

No

v-15

Feb

-16

May

-16

Au

g-1

6

No

v-16

Feb

-17

May

-17

Au

g-1

7

No

v-17

Feb

-18

May

-18

Au

g-1

8

No

v-18

Feb

-19

May

-19

Au

g-1

9

No

v-19

Feb

-20

May

-20

Au

g-2

0

EV/EBITDA -2std -1std

mean +1std +2std


Exhibit 73. AKRA’s Valuation

Source: Danareksa Sekuritas

Free cash flow (IDR bn) 2021 2022 2023 2024 2025

Operating profit 1,585 1,624 1,662 1,562 1,649

(-) Tax (345) (356) (370) (351) (374)

Operating profit after tax 1,241 1,267 1,292 1,211 1,274

(+) Amortisation and depreciation 344 357 370 384 397

Gross CF 1,584 1,624 1,662 1,595 1,672

(-) Capital expenditure (350) (350) (350) (350) (350)

(+) change working capital 30 137 168 142 47

Free cash flow 1,264 1,412 1,481 1,387 1,369

PV of FCF - 2021 1,264 1,273 1,204 1,017 905

WACC 10.9%

Terminal Growth 3.0%

5 years - 2021

Total PV of FCF 5,664

PV of terminal value 11,756

Corporate value 17,420

Equity value 17,420

(+) Cash 2,673

(-) Interest Bearing Debt (3,489)

(-) Minority interest (1,731)

Equity value 14,874

No of shares mn shares 4,015

Equity value/share IDR/Share 3,700

Current price (11 Aug) IDR/Share 2,870

Upside % 27%


Exhibit 74. Income Statement

Year to 31 Dec (IDRbn) 2018A 2019A 2020F 2021F 2022F

Revenue 23,548 21,703 20,367 22,527 26,071

COGS (21,994) (19,811) (18,015) (19,867) (23,203)

Gross profit 1,555 1,892 2,352 2,661 2,868

EBITDA 1,228 1,422 1,710 1,929 1,981

Oper. profit 936 1,095 1,380 1,585 1,624

Interest income 44 38 32 34 47

Interest expense (86) (110) (110) (92) (91)

Forex Gain/(Loss) 0 0 0 0 0

Income From Assoc. Co’s 5 9 9 9 9

Other Income (Expenses) (8) (133) (6) (6) (6)

Pre-tax profit 890 899 1,305 1,530 1,582

Income tax (227) (200) (293) (345) (356)

Minority interest 48 14 (14) 14 (14)

Net profit 1,645 717 998 1,200 1,211

Core Net Profit 712 714 998 1,200 1,211

Exhibit 75. Balance Sheet


Cash & cash equivalent 2,171 1,861 1,964 2,673 3,227

Receivables 4,548 4,379 3,627 4,011 4,642

Inventory 1,357 1,621 1,245 1,377 1,593

Other Curr. Asset 3,193 2,917 2,880 2,912 2,936

Fixed assets - Net 4,922 5,325 5,289 5,295 5,288

Other non-curr.asset 3,751 5,306 5,306 5,306 5,306

Total asset 19,941 21,409 20,310 21,574 22,993

ST Debt 2,427 2,141 1,416 1,514 1,692

Payables 5,213 5,919 5,589 6,183 7,177

Other Curr. Liabilities 423 653 487 550 627

Long Term Debt 1,803 2,469 1,975 1,958 1,634

Other LT. Liabilities 148 160 195 209 216

Total Liabilities 10,014 11,342 9,661 10,414 11,345

Shareholder'sFunds 8,371 8,336 8,932 9,429 9,932

Minority interests 1,556 1,731 1,716 1,731 1,716

Total Equity & Liabilities 19,941 21,409 20,310 21,574 22,993


Exhibit 76. Cash Flow


Net income 1,645 717 998 1,200 1,211

Depreciation and Amort. 292 327 330 344 357

Change in Working Capital (814) 797 670 108 199

OtherOper. Cash Flow 276 5 78 57 44

Operating Cash Flow 1,398 1,846 2,076 1,709 1,812

Capex (998) (731) (294) (350) (350)

Others Inv. Cash Flow (277) (1,131) 32 34 47

Investing Cash Flow (1,276) (1,861) (262) (316) (303)

Net change in debt 431 (656) 0 0 0

New Capital 215 (136) 168 14 (14)

Dividend payment (963) (441) (584) (702) (709)

Other Fin. Cash Flow 594 939 (1,295) 4 (230)

Financing Cash Flow 277 (294) (1,711) (684) (954)

Net Change in Cash 400 (310) 103 709 554

Cash - begin of the year 1,771 2,171 1,861 1,964 2,673

Cash - end of the year 2,171 1,861 1,964 2,673 3,227

Exhibit 77. Key Ratios

Year to 31 Dec 2018A 2019A 2020F 2021F 2022F

Growth (%)

Sales 28.8 (7.8) (6.2) 10.6 15.7

EBITDA (17.1) 15.8 20.2 12.8 2.7

Operating profit (17.7) 17.0 26.0 14.9 2.4

Net profit 36.9 (56.4) 39.1 20.3 1.0

Profitability (%)

Gross margin 6.6 8.7 11.5 11.8 11.0

EBITDA margin 5.2 6.6 8.4 8.6 7.6

Operating margin 4.0 5.0 6.8 7.0 6.2

Net margin 7.0 3.3 4.9 5.3 4.6

ROAA 8.9 3.5 4.8 5.7 5.4

ROAE 20.7 8.6 11.6 13.1 12.5

Leverage

Net Gearing (x) 0.2 0.3 0.1 0.1 0.0

Interest Coverage (x) 10.8 10.0 12.5 17.3 17.9 Source : AKRA, Danareksa Estimates

buy akr corporindo (akra ij) - danareksa online

Documents