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Krakatau Steel: Development Updates

About a year ago, I wrote an article titled The Sleeping Giant, where I say that even though until the third quarter of 2012, Krakatau Steel (KRAS) operationally still had a loss, but this company has a lot of plans of business development that if the development goes well and successful, then the company will make a huge profit. That is why the title of the article was 'the sleeping giant', where I saw this KRAS like a sleeping giant, that ready to get up and 'raging' at any time, as the steel market in Indonesia has a bright future along with the development of infrastructure and others.

Unfortunately, after a year, this giant was still not awake. Until the full year 2013, KRAS still had a loss, this time US$ 14 million. Equity value of the company itself continues to be eroded by the deficit for two consecutive years, so it is now worth only US$ 1.1 billion. As a result, if last year I said that the stock is still not recommended, so this time I have to say the same thing.

However, I received a lot of emails asking about the latest developments of Krakatau Steel. Because, though the financial performance is still minus, but in the last year the management of KRAS has completed a lot of work to move forward the company. Including, if you live in Cilegon, Banten Province, you will be able to see that Krakatau Steel is building a lot of this and that. And if in 2013 KRAS was still losing money, then maybe it's because most of the new projects will start generating revenue in this 2014.

For example, since its IPO in 2010, KRAS has working with a leading South Korean steel company, Posco Steel, to set up PT Krakatau Posco. And through the joint venture, the company immediately began to build an integrated steel plant that will produce slab steel and steel plate with a total capacity of 3 million tons per year, so that KRAS’ steel production capacity will increase by more than double to be about 5.5 million tons per year, from previously 2.5 million tons. And guess what? At this time the steel plant has been completed, and has been operating since December 2013. Yep, despite the progress of the construction is quite long (since 2010), but after all the steel production capacity of KRAS has now been doubled.

Then, one of the reasons why the company has been unsuccessful in making profit, is because of inefficiency issue, where a lot of work, especially the ones related to infrastructure, is given to third parties, because KRAS does not have the infrastructure.

That's why, in addition to building a steel plant, the other projects are the construction of various infrastructure to support the steel plant itself. One is the port that will be used to ferry the steel produced by Krakatau Posco, located in Cilegon. And as well as the steel plant, the port has been completed and has been operational in December 2013. With the self-owned port, then KRAS can save on transportation costs that will automatically increase its pre-tax profit, approximately US$ 28 million per annum.

In addition to port, KRAS also built a power plant. When operating, this facility will lower the cost of electricity usage up to 20%, as the company now has its own power supply. The construction has also been completed by the end of 2013.

The three projects above are the major projects of the company that is already completed and is ready to operate. In this case the management of KRAS might be appreciated because of their success in completing the projects on time (because since the beginning, the steel plant is scheduled to be operational in 2014). Beyond that, KRAS is currently still working on some other business development projects, among others:

  1. Building a water supply for industrial area of Krakatau – Posco. There is no exact schedule about the completion of the project.
  2. Entering the business of industrial estate through a plan to acquire a total of 400 hectares of land in Cilegon, ie at a location not too far from the industrial estate belonged to Kawasan Industri Jababeka (KIJA). KRAS even build a hotel in this region (already completed). The construction of the industrial estate is expected to be completed within 2 - 3 years from now (still long), but so far the company has successfully acquired a land area of ​​75 hectares.
  3. Entering the business of steel pipe by setting up two steel pipe mills with a total capacity of 150 thousand tons per year. These mills are scheduled to be operational in October 2014.
  4. Building a blast furnace mill. The construction has began in 2011, but its completion still have to wait another year, ie 2015.
  5. Building a hot strip mill, will completed in 2017.
A collection of development projects owned by PT Krakatau Steel, either still in construction or ready to operate

Thus, interesting to see about the performance of KRAS in the first quarter of 2014, whether they succeed in generate a net profit or not. Because on the other hand, the poor performance in the last two years is not due to its incapable management or the like, but because of the decline in world steel prices, and a weakening of the steel industry in general. Including the world's largest steel company, Arcelor Mittal, also recorded negative profits aka losses in the past two years.

While in recent times, although still 'shy', but the price of steel has steady at US$ 600 - 700 per ton (depending on the type and usefulness of the steel), from previously US$ 500 - 550 per ton. Coupled with new sources of income from Krakatau Posco, and the cost efficiency that comes from the presence of port and power plant, it is interesting to see the financial performance of KRAS, starting from this year of 2014.

However, since the recent financial statement of KRAS still showing a red figure, then this stock could still not recommended. Okay, in 2014 the revenue of KRAS is likely to increase substantially, but what about the net income? Will KRAS able to make it? Because in working on its development projects, KRAS spend a lot of money including the funds taken from the bank aka loans, where the interest of the loan will certainly depress the earnings, whereas the profit margin of KRAS itself since the beginning is already small. Krakatau Steel’s PBV that is only 0.7 times also a little bit hard to be said undervalue because most of the assets of the company are non-current assets, and because of KRAS sizeable debt with 1.3 times of DER.

That's why, if you are interested in this stock then you should wait until next May, where KRAS will release its First Quarter of 2014 financial statements (and fortunately KRAS is fast in releasing its FS, which shows that the management is quite good). Meanwhile, if you've already hold the stock since the beginning, then so far there is no reason to quit because the poor perfomance of KRAS is still fairly acceptable, and we know that the management has worked hard to make the company become much better (the management of KRAS in the past was bad, but in recent years it was good enough, especially since the CEO has been replaced). So yeah, hopefully the results can be directly visible in May.

PT Krakatau Steel (Persero), Tbk
Rating Performance in Q4 2013 : BB
Rating of Share in 520: BBB

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