Garda Tujuh Buana, Now What?

After suspended long enough, the trading session of the stocks of Garda Tujuh Buana (GTBO) has opened last Monday, and the stocks were successfully gaining 9.6% to 4,275 position. It was a bit surprising actually, as usually when a stock was suspended due to someproblem of the Company (in case of GTBO, the problem is related to its ‘magical’ financial statements), then when the suspension isreleased, the stocks would go down. However, on the other hand there are also some opinions that say that there is nothing wrong with the financial statements (FS) of GTBO, so the stock price is still reasonable, or even undervalued. Anyway, let us check the company's fundamentals.

GTBO established in 1996 in Jakarta, with interest in coal mining. The Company obtained its first-and-only mining concession in 2001,located on the Island of Bunyu, Bulungan District, East Kalimantan Province. Later, after long time of exploration, the mine started itsproduction in 2010, so that year was the first year the Company generated revenue and profits. By the end of third quarter of 2012, GTBO has produced a total of 3.5 million tons of coal, and the remaining coal reserve are still abundant enough, ie 91.9 million tons.

Logo of PT Garda Tujuh Buana

About the types of coal produced by the Company, GTBO produce low calorie coal with calories vary from 4,800 to 5,100 kcal per kg, or so we called low-quality coal. However, the advantage of company’s coal is the location of the mine that is close to the shore, so that the coalcan directly transported to the port and as a result, the production cost is low, thus the selling price of the coal is also low. During the first nine months of 2012, GTBO sell their coal at price of US$ 37 - 40 per ton, much cheaper than the average price the same quality coal of other companies in the country, which is about US$ 55 - 60 per ton. So in this case, the fluctuation of the international coal price have nosignificant effect on Company’s earnings, as since the beginning their coal prices are already low.

Related to the low price of coal of the Company, it might be the reason for Agrocom Limited, a commodity trading company from theUnited Arab Emirates (UAE), who bold enough to paid cash in advance for the purchase of coal from GTBO. So the story, on June 14, 2012, the two companies (GTBO and Agrocom) signed a purchase agreement for 10 million tons of coal at a price of US$ 25 per ton, where the coal will be delivered in stages to Agrocom headquarters in the UAE until 2015 (because GTBO is only able to produce 2 - 2.5 million tons of coal per year). Indeed, the price of coal in the agreement is US$ 39 per ton. But as the cost of the coal production is borned by Agrocom, then Agrocom only have to pay US$ 25 per ton of coal to GTBO, because the production cost is US$ 14 per ton.

Thus, GTBO will earn a total of US$ 250 million or around Rp2.4 trillion, which will be received in stages until the year 2015 (or 2014 to be exact, because Agrocom will pay upfront for coal that shipped in 2015). The part of the amount, which is US$ 75 million or equivalent to Rp711 billion, was paid by Agrocom in the day when the agreement was signed, ie June 14, 2012. In the GTBO’ financial statements, the amount of Rp711 billion was recorded as revenue. And this is what made the revenue and net income of the Company in the second quarter 2012 suddenly jumped, up to more than tenfold compared to the same period in 2011.

So the result, the stocks of GTBO which previously had gained very, very much from the price of 50's to 4,000's (yes, you read that right. GTBO would be recorded in history as the most gaining stock the Indonesian stock market, ie more than 10,000 percent, just in less thantwo years), it was still able to climb up again until reached 7,300 as its peak, before then dropped back and is now perched on the 4.000's.

Related transaction with Agrocom, this bring questions to many parties, including the IDX as the stock market authority. One of the questions is: How could the sum of Rp711 billions received from Agrocom was not recorded as advances from sales, but as revenue? And the management of the Company then answered, which basically stated that based on the Statement of Financial Accounting Standards (SFAS) No. 23 on the recognition of revenue, the transaction with Agrocom meets all the requirements to be recognized as revenue, rather than advance sales. I personally think that the arguments of the management are quite reasonable, so I say it was true that GTBO has earned Rp711 billion of revenue from Agrocom. Agrocom itself has paid the amount in cash.

Going forward, GTBO will receive more revenue from payments made by Agrocom, with details as follows:

1. Payment of the first phase of US$ 75 million, before June 30, 2012 (already paid).
2. Payment of the second phase of US$ 87.5 million, before June 30, 2013, and
3. Payment of the third phase of US$ 87.5 million, before June 30, 2014. So the total is US$ 250 million.

Well, this is where GTBO looks prospective, because if Agrocom will do the second payment in just a few days before the date of June 30, 2013 (probably in on June 14, 2013, or the same as the previous year), then the revenue and net income of GTBO in second quarter 2013 financial report will skyrocketting again, due to additional revenue of US$ 87.5 million or about Rp820 billion. On the other hand, GTBO’income statement in the financial statements of First Quarter 2013 will be normal.

So, the conclusion? Yep, apart from its extraordinary gains, GTBO is indeed interesting, and still attractive. Some other interesting points from this GTBO are: 1. The Company is not in debt at all, except for accounts payable in a very small number, 2. Reserve of coal are still very large, ie more than 90 million tons, and 3. As mentioned above, the price of coal of the company is cheap, so it should not be difficultfor GTBO to gain new customers.

About the stock, GTBO may gaining up to 7,000's position in the next year. A good timing to enter is when GTBO’ financial statements for the First Quarter 2013 have been published, where if based on the statement, the stock valuation at the current price (4,000's) would seem expensive, so it shall go down. But if you've already hold the stock since the beginning, then just hold it.

So now, if you are interested in this stock, then there are some things that you should look at, which it could potentially be risks for your investments in the stocks. Okay, here we go:

First, the amount of coal reserve of the Company, which reached 95.4 million tons (initial reserve before production), is doubtful, because its concession on the Bunyu Island is just 710 hectares. If it is true that GTBO has the coal reserve of that much, then it meanseach hectare of the Company’s mining concession contains coal reserve of 134 thousand tons.

For comparison, the largest coal company in Indonesia, Bumi Resources (BUMI), has concessions covering a total area of 161 thousand hectares, with initial reserves of 1.7 billion tons, or 1,735 million tons of coal to be exact (for its two subsidiaries namely Kaltim Prima Coal / KPC and Arutmin. The other subsidiary like Fajar Bumi Sakti, is not calculated because it is not in production yet). Thus, each hectare of BUMI’s coal mining concessions is only contains 11 thousand tons of coal reserve, or very little when compared with coal reserve of GTBO. The fact is, KPC has always been known as one of the most ‘contained’ coal mining company in the world.

One more thing, note that the 95.4 million tons of coal reserve of the GTBO is proven, so it does not include probable coal reserve. If theprobable reserve is included, then GTBO has a total coal reserve of 168 million tons spread in an area of ​​710 hectares only. Extraordinary, is not it?

Second, GTBO have at least twice revised its financial statements for the third quarter 2012, primarily related to transaction with Agrocom. After I checked it by myself, actually there's no significant difference anyway, but this would inevitably lead to the perception among some investors that the management may have been manipulating the Company's financial statements.

Third, GTBO has been selling almost all of its coal to the export market, especially to India and the UAE, where it is contrary to the Indonesian Government policy related to domestic market obligation (DMO), or the obligation to sell coal to the domestic market. So in the future, the Company would forced to acquire some customers from the local market.

And fourth, according to the Minister of Energy and Mineral Resources Regulation No. 17 of 2010, GTBO is obliged to sell coal at prices that followed the international market price, including paying royalties to the government based on the price of coal on the international market (the amount of royalties = rate x price x tonnage). It means that GTBO should not be and can’t sell coal at a price of US$ 39 per ton, but must follow the international price of US$ 55 - 60 per ton. The problem is of course it would contrary to the contract that has made with Agrocom, and it would be difficult for the Company to acquire new customers.

Okay, I think that's all, then as always, the decision is yours.

Original article was written at January 15, 2013