AKRA:Cash cycle = 7 days - Mandiri

Post Sorini divestment, a notable highlight in AKRA’s F/S is its cash cycle that improved from 29 days in FY10 to only 7 days in 1Q11 as AKRA no longer carries heavy inventory balance from Sorini. Improved efficiency should sharpen the company’s competitive advantage in petroleum distribution business. It posted 1Q11 core profit of Rp128bn (+81.9%yoy, +49.2%qoq), equivalent to some 44% of our previous FY11F and consensus estimates, due to higher-than-expected sales volume and margin. A new customer, Freeport, has already given the largest contribution to total petroleum sales. In addition to volume growth, AKRA also benefits from rising oil prices. We have Buy stance on AKRA which currently trades at PER11-12F of 14.8-13.5x.

1Q11 core profit was above our previous estimate and consensus forecast. AKRA booked 1Q11 core profit of Rp128bn (+81.9%yoy, +49.2%qoq), which was equivalent to 44.1% and 42.4% of our previous and consensus FY11F estimates. The stellar performance was due to petroleum sales volume that reached some 28% of FY11F estimate, and was above the expected margin especially in chemical distribution business. The company also booked Rp1.7tn in extraordinary gains from divestment of Sorini and distributed some 30% of it as special cash dividend.

Strong petroleum business growth. In 1Q11, the company’s petroleum sales volume grew by 95.7%yoy and 25.2%qoq to 507k kl. Most of the growth came from sales to a new customer, Freeport, representing 20.8% of petroleum sales. In addition to that, the company also enjoyed rising oil prices where ASP grew by 26.8%yoy and 18.3%qoq. We like the company’s consistency to focus only on distribution business and not to heavily involve in risky trading business just to speculate on rising oil prices. Upside potential lays on our conservative assumption of stable sales volume during the next 3 quarters, while it usually grew qoq.

Cash cycle improved to only 7 days. AKRA’s efficieny is reflected in its cash cycle that improved from 46 days in FY07 to only 7 days in 1Q11. We identify two factors behind it: (1) stronger bargaining power where the company’s payable is for 60 days while its receivable is only for 30 days, and (2) divestment of Sorini that consumed heavy working capital in term of inventory. Such low cash cycle serves as an entry barrier to its distribution business that competes on efficiency.

Buy on AKRA. Using 11.5% WACC and 5.0% TG rate, we arrived at TP of Rp2,000/share. At the current market price, AKRA is trading at adjusted PER11-12F of 14.8-13.5x. Main risks are unfavorable regulations and declining oil prices.