1. Ticker Code: KRAS Price: IDR 1,220 Target Price: IDR 1,540 Report Date: 1/6/2010 Recommendation: BUYCOMPANY RESEARCH REPORT UPDATE Sector ClassificationPT. KRAKATAU STEEL (PERSERO) TBK.Flooding inundates about half of Queensland state of Australia, IDX Classification: Basic Industry & Chemicalsaffecting an area larger than France and German combined. It swamps IDX Sub-Sector: Metal & Allied Products22 towns and affect the life of over than 200,000 peoples. The statehas declared eight regions as a disaster area and believes there are Investibility Market Cap: IDR 19,876tn / USD 2.196bnmore to come. The catastrophic disaster brings not only increasing Free Float: 20.00%refuge, but also sees the halt of economic activities, especially in Avg Daily Trading to Free Float: 5.36%mining.Hard Coal Net Exporters 2009 Company Data Date of Price 5-Jan-10 0 50 100 150 200 250 300 52-week Range Rp 950-1520 Shares Outstanding 3.155bn Australia 262 Price Target IDR 1,540 Indonesia 230 Price Target end Jun 30 2011 Russian Federation 93 Major Shareholders Percentage Columbia 69 Republic of Indonesia 78.43% South Africa 67 Management & employees 1.96% United States 33 Public 19.61% Vietnam 25 Board of Comissioners Kazakhstan 22 President Comissioner: Zacky Anwar Canada 20 Comissioners: Ansari Bukhari Czech Republic 4 Independent Commisioner Alexander Rusli Others 11 Independent Commisioner Moch. Imron Zubaidy Hard Coal (Mt) Board of Directors President Director: Fazwar BujangSource : IEA Key World Energy Statistics 2010 Directors: Syahrir Syah Pohan Directors: Dadang DanusiriQueensland holds the largest export port in Australia and is a US$ 50 Directors: Irvan Kamal Hakimmn mining industry with production capacity of 243 mn Tonnes p.a. Directors: YerryQueensland accounts for about 55% of the total Australia production Directors (Not affiliated): Sukandarcapacity (Source : Australia Mineral Statistics 2010). Australia, (based onInternational Energy Association) exported 262 Mt of Hard Coal in 2009. Company AddressThe country is also the largest net exporter of Hard Coal in the world.. Head Office Jl. Industri No. 5We believe the disaster will affect the price of steel . Why? Because of P.O. Box 14 Cilegon2 reasons, the first is the tight correlation of steel industry with coal Banten 42435supply as almost all coking coal is used by the steel industry to beconverted into coke in a coke oven and is used in the blast furnace for Jakarta Officethe production of pig iron for steel alloy. Coking coal is the key Gedung Krakatau Steel, 4th Flooringridients of manufacturing iron and steel. Jl. Jendaral Gatot Subroto Kav.54 Jakarta Selatan 12950
2. The second is the fact that Australia is the second largest producer and the number one exporter of cokingcoal in the world. The flooding of Queensland state will surely decrease the production of coking coal , assequaciously half of the Queensland miners have to stall or even tie up their operation. We expect thesudden diminishing of coking coal supply will affect steel prices as the steel producers anticipated the raisingfuture contract prices of coking coal supply combined with current supply and demand mismatch.KRAS is an investment opportunityPT. Krakatau Steel (Persero) Tbk is a state-owned enterprise and the largest steel company in Indonesia. Totalproduction capacity of the company currently reaches 2.75 million tonnes p.a. The Company plans for majorexpansion and equipment revitalization in order to improve efficiency and production capacity, and aim toreach 4.25 million tonnes p.a by 2014Despite of the edgy Initial Public Offering (“IPO”) of PT. Krakatau Steel Tbk, the fact that the state ownedcompany is a leading and the largest steel company in Indonesia doesn’t change. We still believe the freneticprocess do not change the fundamental and intrinsic value of the company.The Company was forecasted to close this year with 1.8 – 1.9 million tonnes of sales in 2010 and expected togrow by 20% up to 2.2 million tonnes in 2011. The primary product of the Company is Hot Rolled Coil (HRC),Cold Rolled Coil (CRC) and Wire Rod (WR), they account for 75% of revenue in 2009. The world prices of HRChave increased by 15% from the beginning of 2010 to September 2010 whilst CRC and WR have increasedby 13% and 20% respectively. WORLD CARBON STEEL PRICES (HRC, CRC, WR) 900 850 800 750 700 650 600 550 HRC CRC WR Source : MEPS Steel PricesThe steel business is relatively a straight forward business, where price and volume are the most dominantvariable and basically driven by the world demand and supply, thus in the end, willdetermine theperformance of the players. . Coking coal is essential for production of steel, providing the necessary carbonfor steel alloy. The cost of coking coal and coking coal transports account for 20-25% of production cost forblast furnace (BOF) steel production.
3. Steel Production ProcessSource : World Coal InstituteThe flood of Australia will strangle the supply of coking coal, thus further increase the variable price. Thecompany which have secured the supply of coking coal by long term contract or any means will benefit aninstant increase of sales margin, while adjusting the new prices and production cost for future sales.KRAS Valuation and ProjectionPT. Krakatau Steel Tbk (KRAS) is still relatively cheap compared to it peers, mainly because the market hypeover the so called “cheap IPO Price”. The hype made the price sky rocketed in the first few days of trading,and drop after the demand dry up. KRAS is trading at Rp 1220 currently (5/1/2011), significantly lower thanits all time high of Rp. 1520 (achieved in its second day of trading), but significantly higher than its IPO Priceof Rp 850.Financial Ratios and Valuation Market Cap PE (x) ** PBV (x) ** EV/EBITDA (x) ** ROE * ROA * current (US$ Bn)PT. Krakatau Steel (Persero) Tbk 7.92 1.82 5.34 8.79% 3.51% 2091.03POSCO (South Korea) 7.56 1.23 5.73 10.80% 8.24% 37661.4Tata Steel Ltd. (India) 9.34 2.3 7.15 -7.95% -1.78% 14213.6ArchelorMittal (Euronect Amsterdam) 12.01 0.96 12.72 0.20% 0.09% 60206.8Shougang concord International Enterprises Co Ltd (Hongkong) 6.78 1.05 24.83 0.89% 0.32% 1220.33Wuhan Iron & Steel 19.72 1.21 20.76 5.52% 2.07% 5082.15Inner Mongol Baotou Steel 85.53 25.45 41.77 3.34% 0.91% 8923.02Source : IRAI’s Compilation* ROE & ROA is using 2009 data** Calculated based on 4/1/2011 price and dataWe see the politization and edgy IPO process provides an opportunity to buy KRAS at a discount prices. WithPE Ratio of 7.92x and PBV Ratio of 1.82x, KRAS is priced relatively lower from the global steel industryplayer. The expectation of growing economy and infrastucture development, combined with the increasingprice of coking coal, may benefit the steel companies by having an increase in margin as as result of furtherraising on steel price.
4. As a consequence, our recommendation for the KRAS is BUY and our target price is Rp. 1540 based on ourexpected 10x PER in 2011.Profit & Loss ProjectionIn Rp Billion 2007 2008 2009 2010 2011Net Revenues 14,836.02 20,631.43 16,913.54 16,300.00 21,190.00Cost of Revenues 13,063.42 17,915.37 15,728.15 12,868.78 16,729.42Gross Profit 1,772.60 2,716.06 1,185.39 3,431.22 4,460.58Total Operating Expenses 979.87 1,355.68 1,159.45 1,229.24 1,598.01Income From Operations 792.73 1,360.39 25.94 2,201.98 2,862.57Other incomes (changes), net (295.370) (619.565) 442.719 - -Income before tax expense (benefit) 497.36 740.82 468.66 2,201.98 2,862.57Tax expense (benefit), net (180.84) (277.21) 27.55 (660.59) (858.77)Income before minority interest in net income of subsidiaries 316.520 463.609 496.204 1,541.384 2,003.799Minority Interest in net income of subsidiaries (3.08) (4.04) (1.53) (1.38) -Net income 313.441 459.571 494.672 1,540.01 2,003.80Balance SheetBalance Sheet Dec 2007 Dec 2008 Dec 2009 June 2009 June 2010AssetCurrent Asset Cash and cash equivalents 636.60 1,100.49 1,759.96 1,100.16 1,518.89 Short-term investments 44.94 5.34 142.55 6.07 1.95 Restricted time deposits - - - - 260.00 Trade receivables 2,338.90 1,994.46 1,642.21 1,926.00 1,725.56 Other current asset 4,469.73 8,522.27 5,143.95 4,627.96 5,510.37Total Current assets 7,427.97 11,557.70 8,631.16 7,584.40 8,942.43Non-Current assets Estimated claims for tax refund 155.97 262.91 186.79 88.52 128.30 Investments in shares of stock, net 34.03 34.15 136.75 44.66 142.10 Defered tax assets, net 23.31 91.42 202.47 462.69 18.58 Fixed assets 3,183.85 3,162.27 3,378.93 3,129.35 3,943.54 Other assets 291.90 265.97 259.70 228.58 168.75Total non current assets 3,689.05 3,816.73 4,164.64 3,953.80 4,401.27Total Assets 11,117.024 15,374.427 12,795.803 11,538.199 13,343.701LiabilitiesCurrent Liabilities Short-term bank loans 2,789.10 6,701.51 4,209.25 4,345.62 3,439.44 Trade Payables 834.94 833.99 738.82 654.99 1,157.33 Current portion of long-term loans 261.33 240.44 222.39 235.53 202.25 Current portion of long-term liabilities 7.62 11.96 2.89 3.82 3.33 Factoring payables - 108.29 - - - Other current liabilities 589.07 729.80 1,231.19 997.71 1,122.29Total Current Liabilities 4,451.87 8,592.32 6,130.35 6,069.55 5,685.17Non Current Liabilities Deferred tax liabilities, net 209.32 1.98 5.77 2.33 87.27 Long-term loans, net of current portion 868.30 711.32 568.64 595.42 584.55 Long-term liabilities, net of current portion 29.83 17.54 20.62 26.20 38.01 Estimated liabilities for employee benefits 468.73 574.16 223.64 617.41 241.37Total Non Current Liabilities 1,576.17 1,305.00 818.66 1,241.36 951.20Total Liabilities 6,028.041 9,897.323 6,949.013 7,310.907 6,636.363Minority Interest in Net Assets of Subsidiaries 14.65 37.34 40.95 35.67 71.37Shareholders Equity Share capital 2,000.00 2,000.00 2,000.00 2,000.00 2,000.00 Other paid in capital 1,303.47 1,303.47 1,303.47 1,303.47 1,303.47 Difference arising from transactions resulting in changes in the equity of subsidiaries 0.38 - 18.47 - 18.47 Retained earnings 1,770.49 2,136.30 2,483.91 888.15 3,314.04Total Shareholders Equity 5,074.33 5,439.76 5,805.84 4,191.62 6,635.97Total Liabilities and Shareholders Equity 11,102.373 15,337.084 12,754.851 11,502.526 13,272.334PT. 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