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ICTSI Jasa Prima

ICTSI Jasa Prima (KARW), formerly known as Maharlika Indonesia, and before that was named Karwell Indonesia, since May 3, 2012, changed its name to ICTSI Jasa Prima, after the company was taken over by International Container Terminal Services, Inc. (ICTSI), a port service company from the Philippines. KARW business activities also changed from previously garment into port services. The corporate action is interesting, because currently there are expectations that the sector of infrastructure will be booming in the near future, and the port is indeed a part of infrastructure. Is ICTSI also have the same expectations, so that they then put their investment in Indonesia?

ICTSI acquires KARW on May 3, 2012, in Singapore through its subsidiary, ICTSI Far East (IFE), which IFE bought 469.7 million shares that representing 80% stake of KARW, with a purchase price of between Rp74 - 77 per share. Then , based on Bapepam regulation, IFE as the new controlling shareholder in KARW must conduct a mandatory tender offer to buy the remaining shares in the market, and this causes the stock continued to rise since last August.

Then, in the disclosure released by HD Capital (HADE) as the broker who facilitated the acquisition process, there was no information about the tender offer, except that the company will announce the acquisition in the newspaper. Also, there was no information about how many shares would be taken over by IFE in the tender offer, or how many shares that have been acquired so far. I think as long as the tender offer is ongoing, the stock will continue to rise. But because the information (about tender offer) is completely non disclosure, we would never know when the tender offer will be done, so the decision to buy this KARW is clearly a speculation.

Now, how about the company?

When ICTSI acquires KARW, the goal is for a backdoor listing. Through KARW, ICTSI then bought six units of cranes, a heavy equipment to lift the container from ship to land or vice versa. The crane will be placed in the Port of Tanjung Priok, Jakarta, so now ICTSI has a business unit in Tanjung Priok. This is the second time ICTSI entered into the port business in Indonesia. Previously, ICTSI also has a subsidiary named PT Makassar Terminal Services (MTS), which is engaged in the container transportation services at the container terminal of Makassar, South Sulawesi. MTS is currently not placed under KARW, but there is a possibility that in the future MTS will be placed under KARW by way of acquisition.

As the operator of the crane, ICTSI through KARW also acquired 100% stake in PT PBM Olah Jasa Andal (OJA), a contract holder from Pelindo II (the operator of Tanjung Priok Port) to provide services in loading and unloading container in several docks. Once again, this is very interesting, because as we all know, Pelindo II is developing a massive project of Kalibaru Port, which is located not far away from the Port of Tanjung Priok, with an investment of US$ 4 billion or equivalent to Rp36 trillion! If later the construction of ‘The new Tanjung Priok’ have completed, and the port is ready to operate, then OJA as long partner of Pelindo II would likely be granted by new contracts.

But of course, it would take some time. Pelindo II had just started to build Kalibaru Port in September 2012, and the port is expected to be operational in 2014, that is, if the progress runs smoothly. Even so, the business of OJA at Tanjung Priok port remains prospective, due to the traffic of container that is increase 26% (in average) per year, while on the other hand the supply of infrastructure at Tanjung Priok port is still low, even if compared with neighboring Malaysia, so there is still a plenty of room for expansion. I think this is what causes ICTSI entered into Tanjung Priok, because in addition to the good prospect of Tanjung Priok itself, there are additional prospects if Kalibaru Port could actually operate in the next two or three years.

ICTSI spent Rp334 billion to acquire OJA and the crane. The money will be accounted in the balance sheet of KARW as a debt obtained from ICTSI Limited, the parent of IFE, which is the parent of KARW. So the company structure from the highest to the lowest is as follows:

ICTSI Philippines
ICTSI Limited
ICTSI Far East (IFE)
ICTSI Jasa Prima (KARW)
Reliable service PBM Olah ( Oja )

After the corporate action, KARW' revenue and net income would be increased several fold, which is derived from consolidated revenue and net income from OJA. The management estimates that revenue of KARW as the parent company of OJA will reach Rp239 billion in the full year 2012, up nearly ten times higher than in 2011 that was Rp25 billion. KARW total assets will increase to around Rp500 - 600 billion, from the previous Rp13 billion in 2011. However, most of these assets will be accounted as debt (obtained from ICTSI Limited) rather than equity. I can imagine that KARW’ financial statements in the next third quarter 2012 will have a very large return on equity (ROE), but its debt to equity (DER) will also very large. ICTSI Limited itself will gradually give loans to a total of US$ 70 million or equivalent to Rp640 billion to KARW, which will be used for investing activities. So after buying cranes and acquired OJA, there is the possibility that in the future KARW will acquire more cranes or such.

The problem here, what is the interest of the loan? Because if the interest is too large, then it means that the net profit of KARW will be transferred to ICTSI Limited, thus KARW will get nothing. Or, is KARW planning to hold a right issue, where the money will be used to pay the debt to the parent?

In conclusion, I consider that KARW have some prospects, especially since I do believe, or I hope, that the infrastructure sector including port will be booming in Indonesia in the future. In addition, ICTSI is a quite prominent and well-established company who has operations in 17 countries, so they should have no difficulties in developing the infrastructure in Tanjung Priok port, and also Kalibaru port if the port is operate.

On the other hand, there are at least two points in question about the ICTSI acquisiton process against KARW: 1. The tender offer that is less transparent, and 2. Why did ICTSI Limited provides funding to KARW in the form of debt rather than equity?

Then how about the stock? Because KARW’ latest financial statement does not including the consolidated revenue from OJA (the statement is prior to the acquisition), then we cannot analyze it, so the stock is not recommended as there is no fundamental background. We'll see their financial performance in the third quarter. But for the period that ended July 31, 2012, where OJA has been consolidated, KARW recorded revenues of Rp122 billion, and operating income (not net income) of Rp5 billion. Quite good, but it had to be better.

Original article was written at September 23, 2012

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