ON THE PLATTER: AKR Corporindo (AKRA IJ; BUY; TP IDR1,880) Initiation of Coverage: Building a Solid Backbone - OSK Group

AKRA, a leading distributor of energy products and the first private distributor of refined petroleum products in Indonesia, is set to post an earnings CAGR of 56% from FY10-13f. Post divestment of Sorini, the company will be mainly leveraging on its logistics and infrastructure assets as the backbone of growth of its petroleum and chemical distribution business, as well as coal business. As such, we initiate coverage on AKRA with a BUY rating and fair value of IDR1,880/share, based on a DCF valuation, with WACC of 12.8% and a growth rate of 3%. This translates into an upside potential of 23%, implying a 15.8-11.4x PE11-12f.

· Market opportunities abound. Around 45% of AKRA’s estimated equity value of IDR7.4trn comes from petroleum business. We expect revenue from its petroleum business to grow by 67%-37% in FY11-12f given the fact that the company is adding 76,900 kilolitres (kl) of infrastructure facilities to capitalize on growth opportunities in the petroleum downstream sector. This allows AKRA’s petroleum sales to grow by a CAGR of 31% from FY10-13f, thus expanding its current 7% share of the unsubsidized fuel market. Please note that Indonesia’s annual consumption of refined petroleum products amount to 65m kl, with 40% being unsubsidized industrial fuels.

· Entering the coal business. AKRA owns five coal mine sites (total 24,388ha) in South Barito district, East Kalimantan, with estimated coal reserves of more than 50m tonnes of low calorie coal (GAR: 5,000 Kcal). It is currently developing a 4,000 ha coal concession in Muara Tewe in Central Kalimantan, which is expected to initially produce 300,000-500,000 tonnes in FY11f. Having no experience in coal mining, the company will hire a mining contractor and focus only on what it is are good at, i.e. developing logistics coal infrastructure. The development will include the construction of two coal terminals along the Barito River. This will maximize the synergy by integrating coal and petroleum infrastructure logistics in Central Kalimantan.

· Sitting on a cash hoard. The company plans to invest about USD110m in capex for the next 2 years. The financing will be internally funded, with the company is expected to maintain its strong cash position even after paying a cash dividend, which would still leave it with the IDR 1.7trn from Sorini’s divestment. In addition, the company just raised IDR530bn from a rights issue in FY10. We also expect it to generate a healthy FCF of IDR479bn over the next 2 years, or around 8% yield. The company’s short cash conversion cycle of 10 days in FY11f should keep its working capital low.