Harum Energy

When Berau Coal Enery (BRAU), a coal company, decided to hold IPO sometimes ago, some analysts slightly questioned the decision. It was because regardless of BRAU’s fundamental sector itself, coal sector in Indonesia was on the bad state lately. On the late 2009, most of the coal companies in Indonesia were enjoying the increase in revenue and net income significantly, which was supported by the increase in the price of coal. But in the first quarter 2010, the coal companies’ revenue started to decline, along with the sluggishness of production volume, and the decline was still continued until the first half 2010.

Let’s take an example of Adaro Energy (ADRO), which experienced decline in net income of 48.7% on the first half 2010 compared to the first half 2009. As well as Bumi Resources (BUMI), which its net income declined 30.0%. You can check the other coal companies: most of them experienced declining in performance with various percentage, including BRAU, except maybe for other smaller-sized coal companies.

The decrease in performance was due to the decline in coal production volume, so automatically, it also mean decreased the sales volume. The cause? It was weather factor. In the last months, heavy rain still drench most areas in Indonesia including the coal mine sites, though it was the dry season. The heavy rains was clearly obstructed the coal production process, particularly the draining process. As we’ve know, the coal must be dried first before it can be sold (the wet coal cannot be used for fuel), where the draining process is so difficult if the bad weather continues. As a result, the overall production process was obstructed.

The decline in the coal sector's performance inevitably influenced the stock price of coal in the stock exchange, although not all of them. However, some popular coal stocks started to move lower. ADRO that some times before was steady in position of 2,000 –  2,100, now began to descend to position of 1,940. BUMI was also only capable of reciprocating in the position of 1,700  (in average). What about BRAU? In contrast to the expectations of many analysts (including me) who estimated that BRAU will rise a lot, BRAU was only able to soar momentarily, thereafter continue to be dragged into weakening like other coal stocks. When this article was written, BRAU stalled at position of 420, or only rose 20 points from its initial price.

The good news is, though the majority of the coal companies recorded a decline in performance which impact on its stock price decline, however, some smaller-sized coal companies was still able to record an improvement in performance. For examples was Bayan Resources (BYAN) which recorded net profit of 45.1% in first half 2010. As a result, BYAN currently firmly in the position of 9,100, after the end of last June was still in the position of 6,200. It means that BYAN has gone up more than 40%! Although in valuation, the price of 9,100 was considered too expensive, but because the performance in first half 2010 of BYAN was prominent in the midst of the bad atmosphere of coal sector, then psychologically, the stock still seemed cheap, though of course the price at this point is already prone to profit taking.

Then what about Harum Energy?

Just like the other coal companies that having their heyday in 2009, Harum Energy (HRUM) also recorded a significant increase in performance in 2009, in which the revenue rose up to 75% compared to 2008. Its net income also rose to five times as much, or more precisely was 537%.

Unfortunately, HRUM was also included in one of the coal company that recorded a decline in performance in 2010. In first quarter 2010, HRUM recorded revenue of Rp895 billion and net profit of 134 billion. If the numbers were annualized, then the revenue would be Rp3.6 trillion and the net profit of Rp536 billion for the full year 2010. When compared with 2009, in which HRUM recorded revenues of Rp4.6 trillion and net profit of Rp768 billion, the achievement of performance in first quarter of 2010 is obviously cannot be said to be encouraging.

But what about HRUM’s performance in first half 2010? Could it be better? Their performance in the first half 2010 was probably better than the first quarter 2010, but if you look at the bad weather lately, then the possibility is small.

So, whether HRUM will eventually experience the same fate as BRAU? Before concluding this, there is one more factor to consider:

We know that the coal sector is one of the investors’ favorite in the the Stock Exchange. As a result, many securities or coal company itself issued a 'powerful movement' if the performance of this sector down, so that the interest of investors to invest in this sector did not decline as well, and the market liquidity is maintained. What is it? Playing with the future aka prospect, of course. The performance of coal companies in first quarter 2010 and first half 2010 was not so good. But what about the company's performance in 2011 or 2012? Who knows it will rise again like in 2009?

And that was indeed what was done by HRUM’s management. To make its IPO sold well, HRUM announced that they targeted coal production volume of 14.5 million tons in 2012, or three times bigger compared to the realization of coal production in last 2009, which was only 5.8 million tons. For the investors, such information sounded as if the company has realized the coal production amounted to14.5 million tons (in fact, it hasn’t), so they will be interested to buy the stock.

Well, the good news is, the stock price movement of coal is often influenced by positive sentiment like that. For example is PT Bukit Asam (PTBA). PTBA in fact also recorded a decrease in performance in first half 2010, in which its net profit slumped 43.0%. But when this article was written, PTBA was firmly on the position of 18,450. Yet on 24 August, PTBA was still in position of 16,350. What happened? Apparently, the company in question got new railway construction projects for the purpose of transporting coal production. The presence of the railroad would facilitate the company's production process, so that the company's revenue in the future is likely to increase. As a result, the positive expectations of this news could boost PTBA stock amounted to 12.8% in just a few days. Is PTBA future performance will actually increase as expected? Not necessarily.

Back to HRUM. When compared with BRAU, HRUM has better fundamental because it has fewer debt (even though HRUM's debt was considered pretty much). So the news of the production targets in 2012 is likely to be responded positively by the market, (although the response may not be as good as the above example of PTBA,  because the content of news is different). So that HRUM’s stock still has chance to soar, maybe 10 - 20% on its first and second trading day, before then fall back or move stagnant. Although the investment options in HRUM is quite speculative (because only rely on sentiment), but the risk is relatively smaller than if you buy BRAU.

But if your purpose is for long-term, then it’s better if you collect HRUM’s stock when the weather gets better. Besides, the price of Rp5,000 per share is considered expensive, particularly if we reflect on the outlook of the coal sector today.

PT Harum Energy, Tbk

Performance rating on 1Q10: BB

Stock rating on 5,000: BBB

Next week, we will discuss about Agung Podomoro. Just a clue, if the coal sector is not in a good state now, then the property sector is in the opposite condition. Along with the improvement of Indonesia’s macro economy, some property companies recroded an increase in performance in first half 2010. Let’s see whether Agung Podomoro has the same improvement or not.

Original article was written on September 14, 2010.