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Berau and Benakat: What the Hell?

Judging from the production volume on 2009, Berau Coal Energy (BRAU) is the fourth largest coal company in Indonesia, after the combination of Arutmin and Kaltim Prima Coal (both subsidiaries of Bumi Resources), Adaro, and Kideco (subsidiary of Indika Energy). On 2009, Bumi Resources recorded coal production volume of 57 million tons, Adaro recorded 41 million tons, Kideco was 25 million tons, and BRAU was 14 million tons. BRAU was greater than Indominco Mandiri (the subsidiary of Indo Tambangraya, which recorded 12 million tons), and PT Bukit Asam (11 million tons). It looks like BRAU is a serious coal company, should be like that.

The IPO of BRAU gained lots of attention in the market, because the acquisition of funds target was quite great, which was amounted to Rp2.7 trillion (which later revised to be Rp1 trillion only, but still quite great). The total of released stocks was also quite large, which was up to 7 billion of shares, so it became a guarantee that the stocks transaction volume would be liquid. Then how about the prospect?

BRAU probably reminded some of you to IPO of Benakat Petroleum (BIPI), sometimes ago, because there are some similarities between the two: 1. The underwriters was the same, which was Danatama Makmur, 2. The IPO value were both great, IPO value of BIPI reached up to Rp1.6 trillion, 3. The company’s structure was complicated, where there were many strange and vague companies located in British Virgin Island, Seychelles, etc, 4. The company seemed very big, when in fact, they are not. Wait, does it mean that BRAU a small company? Or does it have poor performance? Let’s check it out.

On the financial statement dated on 28 February 2010, BRAU recorded asset of Rp12.3 trillion. It was quite big indeed, but unfortunately, half of it, which was amounted to Rp8.6 trillion was in form of debt. Prior to that, on 2007, BRAU only had asset amounted to Rp4.8 trillion. On 2005, BRAU didn’t have any asset except for cash funds worth no more than Rp1.3 trillion. Looking from any side, the increase of asset was hardly said to be fair. BRAU probably was the only company in Indonesia, which assets increased almost ten thousand times in just 5 years. And that spectacular increase was almost completely not derived from an increase in net working capital, but rather from the addition of the paid-in capital and debt.

It’s like a company that miserable before then suddenly rich, not because the real income increased, but because there was the third party who gave the company a mountain of loans. Did the company then became big because of the loans? Of course not, in fact the opposite: the company now has liability to pay off the loans plus the interest.

The one who became rich are those behind the company, because it’s them who get the money, but the debt status incurred by the company. How’s so? By involving lots of companies in the corporate structure of BRAU, so the real owner of BRAU whose responsible for the debts became complicated. That’s why in the corporate structure of BRAU there are lots of strange companies such as Seacoast Offshore (British Virgin Island), Winchester Investment (Seychelles), and Aries Investment (Malta), which intentionally established to be the representative of BRAU’s owners. These companies, then, ‘responsible’ for those debts, while the people behind BRAU will remain undisclosed.

Some of you may say that this is a common practice for a company that have been taken over by a private equity (PE) firm, as BRAU was previously owned by entrepreneur named Ibrahim Risjad, but now it is owned by Bakrie Group through Recapital. And yes, Recapital as a private equity firm have acquired BRAU by using debt, and then gained profit, and this IPO is their exit strategy. But this article is intended for public investors, not for some big fish like them.

Ok, now let’s return to the financial statement of the company. Until last 2008, BRAU only had equity of Rp378 billion, yet its debt already reach up to Rp5.5 trillion. The total amount of debt of BRAU continued to rise. On 28 February 2010, BRAU was recorded having debt amounted to Rp8.6 trillion. On the same period, BRAU indeed was recorded equity of Rp3.4 trillion, which rose significantly than in 2008, but it came from the addition of paid-in capital amounted to Rp2.4 trillion.

What’s need to be noted is, from the total of liabilities of BRAU amounted to Rp8.6 trillion, Rp2.7 trillion of it is a short-term debt that will be due within a year. We surely understand that those people behind BRAU would not gave up so easily, in the sense that they wouldn’t pay off that Rp2.7 trillion of debt in form of cash, but could be in form of debt (again). That’s why, sometimes ago, BRAU still reported to achieve debt amounted to US$750 million. That funds were sufficient to pay (refinancing) some of the debts that would be due soon. What if the debt of US$750 million will also be due soon? It’s easy; just do refinancing again. And so on.

So, does BRAU a serious coal company? Serious, yes, but not in the coal sector (at this point), but in taking its investors’ money (through IPO). No matter how big the coal production of BRAU, it seems that the generated net income will not be able to cover its overload debt. Who doubt Bumi Resources as the largest coal producer in this country? But you may see how they pay off their debts: If not by doing right issue or conversion of the debts into equity, then by rescheduling the pay time, or refinancing. It’s possible that BRAU will also become like that.

Benakat Petroleum (BIPI)

Do you still remember about BIPI? This oil company got fresh funds amounted to Rp1.6 trillion from its IPO on last February. It promised that BIPI would acquire 3 mining companies at once. Was the acquisition using that Rp1.6 trillion of fund? No, I have no idea which fund it used. Well, sometimes, the retail investors will not pay attention to this thing. They only notice on ‘BIPI will acquire 3 mining companies’, so that they hunt the stock in droves. They don’t really notice whether the promised acquisition would use their fund amounted to Rp1.6 trillion or not (the fund is taken from your money, right?).

It’s almost through half a year since IPO, BIPI apparently had not acquired any mining company. Indeed, BIPI had acquired Elnusa (ELSA) amounted to Rp800 billion (in average), but not using the funds from IPO, instead of borrowing funds from its holding company, PT Indotambang Perkasa. Does the Rp1.6 trillion of funds were used to develop the oil field as its promise? Apparently not. Until last June, BIPI had just used the IPO funds amounted to Rp109 billion to develop its oil well. The rest of it, which was Rp1.46 trillion, was left alone and placed as deposit in Bank Capital. Because lately it was discovered that the deposit in Bank Capital was actually absent, BIPI rectified it by saying that the funds were saved in form of repo in Wellington Ventures Ltd.

I don’t know whether it’s true or not, but clearly, the fund of Rp1.46 trillion weren’t used to develop the oil field as promised. The repo saving obviously more profitable than manage the oil field, right? Just place the funds, and wait. With interest rate of 12% yearlong, then the management will receive net funds amounted to Rp177 billion within a year without having to work at all.

Just like BRAU, it’s clear that BIPI is better at managing the investor’s funds than managing the oil field. BIPI is even worse than BRAU. It’s because BRAU is at least producing coal (in quite large amount), while BIPI? How much does its oil production? No wonder that its stocks sag.

Whether due to the information about the use of IPO funds by BIPI or the other, lately, the management of Danatama, the security that administers IPO of BRAU, rectified the proceed target of IPO, from US$300 million to only US$100 million. One of its executive stated, ‘If the acquisition of funds is excessive, it will be questioned by Bapepam; what the funds used for?

So, does it mean that if the fund was ‘only’ US$100 million, then either Bapepam as the authority or investors will not question and ask for accountability about the use of those funds? How petty!

At the end of the day, the existence of companies like BRAU and BIPI is still needed to enliven the exchange and maintain the market’s liquidity. Investing on these stocks indeed can make your pocket dried up in a blink of an eye, particularly when you are not careful and just take the information released by the interest parties. But if you are good at speculating, then it’s not impossible that BRAU can make your portfolio fatter, also in a blink of an eye. For the speculators, this high-risk play is fun. But if you are not good at speculating, then remember that no one push you to buy these vague stocks. There are still a lot more of healthy stocks to be collected.

Just like other IPO’s stocks, BRAU is also likely to rise on its first trading days until the next one or two months. BRAU might even have the opportunity to be at the level of 1,000. After that? We’ll see.

Additional note (written on 20 Agustus 2010)

Based on this comment: Mr. Teguh should be acknowledged to have formal knowledge in financing, or probably your basic knowledge was on this field? But your EXPERIENCE in the stock market world seems SHALLOW and SUPERFICIAL. The last time BUMI did right issue was on 2000, and since then they didn’t do right issue or debt conversion anymore. Your statement was: “Who doubt Bumi Resources as the largest coal producer in our country? But see how they pay off their debts: if not by doing right issue or conversion of debts into equity, then by rescheduling the pay time”. It shows that you are very inexperienced.

It seems that there’s something I need to clarify here. Let me discuss this in short.

About the right issue, yes, last time BUMI did that was on 26 May 2000, and after that, never again. But BUMI’s holding company, which is Bakrie & Brothers (BNBR) had did the right issue worth of Rp40.1 trillion on 2008, which half of it was used to acquire 35% of BUMI’s stocks amounted to Rp36.8 trillion. The funds, then, was used by BUMI for various purposes, including to pay down the debts.

So, Bakrie Group as the owner of BUMI didn’t do right issue through BUMI directly, but through its holding company or other companies. Later, the funds from the right issue can be injected in form of acquisition or others. Besides for BUMI, the funds generated from right issue of BNBR also used to acquire Energi Mega Persada (ENRG) and Bakrieland Development (ELTY). Yup, that’s the benefit if you have many companies: If one of your companies seemed cannot execute certain corporate action, then you can do that through the other company.

Then about the debt conversion. On 2007, BUMI had issued bonds conversion amounted to US$300 million, which used to convert its debts to Credit Suisse (CS) to equity. Consequently, on last 2009, CS has BUMI’s stock worth of Rp286 million, when the previous year, CS did not have BUMI’s stocks at all. On the first quarter 2010, the stock ownership of CS in BUMI increased to 354 of shares.

By the way, Credit Suisse is one of the main creditors of BUMI. On the first quarter 2010, BUMI still had short-term and long-term debt to CS amounted to US$487 million.

In the future, which is approximately on next September, there is possibility that BUMI will do right issue and debt conversion, where BUMI will issue new stocks without HMETD amounted to Rp4.6 trillion. The funds will be used to pay the debt to Country Forest, Raiffeisen Zentralbank, JP Morgan, and of course Credit Suisse, in form of debt conversion into stocks. Here’s the link. But if I’m not mistaken, BUMI has already denied that rumor. Whether it’s right or wrong, maybe it’s better if we wait until the next September.

Once again, I apologize if the discussion above seemed quite unpleasant for some of you. I just try to be objective. But probably the article above was too critical, so I’ll try to be less intense in the future.

Original article was written on July 29, 2010.

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