AKR Corporindo (AKRA IJ, Rp1,680 BUY) Fuel for growth - Danareksa

We reinitiate coverage on AKRA, Indonesia’s leading bulk logistics and Infrastructure Company and the largest private sector distributor of petroleum and basic chemicals, with a BUY recommendation. We like the company for several reasons. First, the company intends to boost its capacity by 76,900 Kl, supported by better opportunities for its petroleum trading and distribution. The capex for this will be spent within 2 years. Secondly, the rosy outlook for oil prices should lead to higher earnings. And thirdly, AKRA’s new coal business should start contributing revenues this year (IDR 220 bn in our estimate). We value the company at Rp 2,000/ share, implying 2011-12F P/E 16.52 – 11.70 x.

Better opportunities for petroleum trading and distribution
With an extensive network across Indonesia, AKRA has managed to establish itself in the market-based regime for the downstream sector. The company also won the government tender to distribute 103,220 Kl of subsidized fuel in 2011. To seize on the opportunities in the mining sector, AKR added 30,000 Kl of capacity at the Stagen HUB terminal in South Kalimantan. This tank terminal recently started operating in February 2011. Looking ahead, the company hopes to expand its business by building 12 new terminals/tanks, with significant capex reaching IDR 800 bn over the next two years. These terminals/tanks would increase total capacity by 76,900 Kl.

A higher oil price leads to higher earnings
AKRA’s business model is based on a fixed gross margin percentage. However, the oil price and the exchange rate are components in the base calculation. Our sensitivity analysis shows that higher oil prices translate into higher earnings. Our FY11 and FY12 oil price estimates are US$ 86.75/barrel and US$ 87.10/barrel, respectively. The Mean of Singapore Platts (MOPS), as the basis for the calculation of the average selling price, exhibits larger movements in response to oil price changes. Hence, a larger spread between the two means the company can expect higher ASP, thus boosting the revenues earned by the company.

Entering the Indonesian coal market
Having experience in China’s coal business since 2006, the company hopes to achieve success in the Indonesian coal market while still focusing on its core trading and distribution business. The coal mining activities in Indonesia will commence in May 2011. FY11 production is forecast to reach an estimated 300,000 tonnes, contributing IDR 220 bn in revenues. The coal will be exported to China, since the low emission properties of the coal mined make it suitable for use as a green energy source.

Cash aplenty
Following the Sorini divestment, AKRA is sitting on net cash of IDR 1,702 Bn. The Company plans to use the cash to fund its planned capex i.e. the building of 12 new tank terminals across Indonesia, in addition to providing funding for its profitable subsidiaries in China and for entering the coal sector in Indonesia. Yet taking into consideration this capex in addition to the estimated cash from its historical cash cycle turnover, the company may still have IDR 1,175 Bn of cash by year-end. Thus, we believe the company may be able to disburse dividends amounting to IDR 308/share (representing a dividend yield of 19%). Worth noting, however, is that the company has not announced any intention to disburse its remaining cash in the form of dividends.