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Delta Dunia Makmur, Debt Problem

In 2006, David Bonderman, the boss of the largest private equity firm in the world, Texas Pacific Group (TPG), visited Indonesia to seek investment opportunities, along with a young man who was 30 years oldPatrick Sugito Walujoan owner of a local private equity firm, Northstar Equity Partners. Bonderman and Patrick previously had known each other when Patrick worked for Goldman Sachs in New York. After several meetings, Mr. Patrick had convinced Bonderman that he was the right partner for TPG to invest in Indonesia. So, they both later founded Northstar Pacific Partners, a holding company that is used to establish or acquired several companies, notably Bank BTPN (BTPN), and Bukit Makmur Mandiri Utama (BUMA), which is listed on the Indonesian stock market/IDX through its parent company, DeltaDunia Makmur (DOID).

A few years later, the investmentstarted gaining profits. The most successful investment is probably BTPN, which has now become one ofbanks with the best performance in the IDX. But how about DOID? Well, we could say that Mr. Patrick is a little slipped in DOID, as until the third quarter of 2012, the company was still recorded negative performance with a net loss Rp353 billion, up significantly from the previous year amounting to Rp12 billion. If only DOID was able to record the good performance just like Bank BTPN, then it was not impossible that the name of Patrick Sugito Walujo would appear in the list of Forbes Magazine, as one of the 40 richest people in Indonesia.

However, until now there has been no sign that Northstar will be out from DOID, but rather go deeper by increasing its capital amounting to Rp1.2 trillion in mid-2011 (through a rights issue). On the other hand, for retail investors, DOID starting to look attractive after the decline of its stock stopped in the 150's, then it back to 240. So, it is time to buy the stock? Before answering that question, let us check the company’s fundamentals.

Logo of Bukit Makmur Mandiri Utama, a subsidiary of DOID

The story begins in 2008, when Mr. Patrick took over a coal mining contractor companyPT Bukit Makmur Mandiri Utama (BUMA), fromanother young businessman named Jimmy Budiarto (owner of J Resources Asia Pacific / PSAB). The value of the acquisition were not disclosed, but some say US$ 200 million. A year later, precisely in November 2009, Northstar acquired a small property company in the stock exchange, DOID, to be used as a backdoor listing object for BUMA, which then DOID acquired BUMA (BUMA became a subsidiary of DOID) with a acquisition value of US$ 240 million. DOID then changed its status from the property company into coal mining contractorcompany, as at the same time DOID sold off its assets in the property sector.

Unlike the other backdoor-listing-companies that usually hold a rights issue after the acquisition is completed, DOID held no rights issue but took the debt from the bank. In May 2011, BUMA signed a syndicated loan facility of US$ 800 million from eleven banks, namely Bank Mandiri and the rest are foreign banks. Few months later, ie in August 2011, BUMA also obtained a loan from Bank CIMB Niaga amounting to US$ 25 million, bringing the total loan of US$ 825 million or equivalent to Rp8 trillion, all of which are used for working capital and debt refinancing. The majority of these loans are long-term loans that will mature in 2018 and 2019, and bearing interest rate of 2.7 - 4.6% per annum.

Related to the debt, then there are some things that become difficulties for BUMA (or in this case DOID) to be able to make profits. First, the amount of debt taken was very large, one of which is due to debt refinancing. When Northstar Group took over BUMA in 2008the company had already a debt of US$ 310 million. The debt then paid by issuance of bonds at a value of US$ 315 million in the same month when BUMA placed under DOID, ie November 2009, and one-half years later the refinancing process is continued where BUMA took long-term bank debts totaling US$ 825 million, as already mentioned above. If only Northstar not to bear the innate debt of BUMA, then thebank debt taken by BUMA for capital expenditure (under the new management) might be only about US$ 500 million (although the numberis still a large amount, because the assets of BUMA before acquired by Northstar was only around US$ 400 million, including its debts).

Second, the aftermaths of the debts are as follows:

  1. DOID must pay large on interest. Until the third quarter 2012, DOID spend Rp365 billion only to pay interest on the loan. While as already mentioned above, the interest rate of the loans borne by the company is actually relatively lowie less than 5% per annum.
  2. Since the company's operating profit before non-operating expenses (including interest expense) and taxes was only Rp459 billion(up to the third quarter 2012), then the interest expense of Rp365 billion was certainly very large.
  3. Plus losses due to foreign exchange (because DOID gained its revenue in Rupiah, while its debts are denominated in U.S. Dollars), where the loss is increasing every time the Rupiah weakened against the U.S. Dollar, then DOID ultimately unable to record someprofits, but net losses of Rp353 billion in Nine Months 2012.
  4. And because the company till now are not able to make profits, so far DOID only focus on debt refinancing (taking on new debt to pay the old ones) to obtain a cheaper interest rates, and there is no repayment efforts, perhaps at all. As a result, the percentage of interest rate of the loans was successfully decline from 11 - 12% to less than 5% per annum, but the value of the loan itself is not reduces at all.

The problem here is, if DOID (or in this case BUMA) is not able to increase its revenue and operating profit to cover interest expense andloss of foreign exchange, then of course the company's net income will continue to be minus. On the other hand, BUMA is still need huge cash for working capital, so even if the company sometime is able to make net profit, the generateretained earnings will not be used to pay debts, but for capital expenditure (capex). For the year 2012, BUMA spend up to US$ 300 million for capital expenditure, increasedsubstantially from US$ 220 million in 2011.

And if Northstar does not add Rp1.2 trillion of capital into DOID’ equities from its rights issue, then the net capital of DOID should have been minus aka capital deficiency, because the deficit has reached Rp716 billion, up from the previous amount of Rp363 billion.

The conclusion? Well, I have not seen a light here. Because the analogy is simple: If you have a company with some debt, which the net income od the company does not even cover the cost of interest alone, then how you will pay off the debt? The option of more refinancingis also seems impossible, because the interest rate borne by the company has been quite low in the level of 5% per annum, so it could notbe lower.

So, the only solution is to continue to increase revenue and operating profit. But how? Well, unfortunately the company does not explainedabout any forward measures that will be carried to increase revenue, which maybe it is because since the beginning BUMA is already one of the largest mining contractor in Indonesia (actually the second largest, after Pamapersada Nusantara), with its first-class customers like Berau Coal, Kideco, Adaro, Bayan, Arutmin, and Kaltim Prima Coal / KPC. I mean, if BUMA want to increase their revenue to be more than doubled, for example, then perhaps they need to expand into overseas, let say China or Australia, because most of the giant coal companies in Indonesia are already users of their services. BUMA could probably just sell mining services to the small coal minings inKalimantan, but the revenue will certainly not be as big as revenue from Berau et al.

If acquiring new customers is seems hard to do, then the other option might be to acquire coal mining to obtain new sources of revenue, and that's what the company does. In last October 2012, DOID acquired two coal mining companies which are not yet in production, namely PT Banyu Biru Sakti (BBS), and PT Pulau Mutiara Persada (PMP), with an acquisition value of Rp162 billion in total. There are no data on coal reserves owned by the two companies, but BBS and PMP has mining concessions covering an area of ​​over 7,500 and ​​3,500 hectares respectively, located in East Kalimantan and Jambi. Well, we'll see how it goes.

In conclusion, if in last June 2011 I said that DOID could not be recommended, so this time I would say the same thing: DOID can not be recommended, even though at the current price (240). At first, I had hoped that maybe DOID at the price of 200's was quite interesting, considering the stock was also rebounded yesterday. But unfortunately, its PBV by the price of 240 is still high, at 2.2 times, and its PER is also a minus because net income is negative.

However, if you still believe in Northstar Group, particularly Mr. Patrick in terms BUMA and DOID, then you can continue to monitor the development of DOID’ performance from time to time. BUMA is actually a good company, witha mining contracts value of approximately US$ 5 billion, or nearly reached Rp50 trillion. But the company is seemed wrong in the management of its leverage, and it's not entirely the fault of Northstar Group, given that BUMA has already in huge debt since before it was acquired. So let's see, what Northstar would do next.

At first, I also had thought that Mr. Patrick was a bit tricky because he puts BUMA behind DOID. But now, as far as I could see, Mr. Patrick seems to be a conservative businessman, similar enough to the Salim Group, but very different from the Bakrie Group.

Original article was written at January 22, 2013

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