KKGI and LSIP

One of the difficulties experienced by investors when the Jakarta Compiste Index (JCI) was high, is to find stocks that are still undervalue. Well, the easiest solution is to wait until later the JCI was down. But sometimes, waiting is just boring. That's why I check back some stocks I ever had in the past, which at this point I've had it 'forgotten'. Who knows, any of them could still be collected, or at least could be considered again. As a result, I found two stocks that seem quite interesting. They are Resource Alam Indonesia (KKGI), and PP London Sumatra (LSIP).

For KKGI, I have had noticed and had the stocks since November 2010, or about two years ago. At the time, if you still remember, the stock was just gained significantly from 900's to 1,700's. A friend of mine asked me to analyze it, and the results, I found that this small coal mining company had a very good performance, while its valuation at 1,700 was still very undervalue, so I immediately bought it. KKGI itself was previously had not noticed by investors because it was not liquid, because the number of public stocks of KKGI before stocksplit was only 92 million pieces. After the company did a stocksplit in a ratio of 1:4 in March 2010, the KKGI shares of public were split into 368 million pieces, and began actively traded. And along with the increase of liquidity, KKGI slowly but surely began to rise.

One and a half years later, in February 2012, I finally sold the stocks at a price of 8,000, with taking some good profits. As per the predictions, though it had continued to rise to 8,500, but then dropped to 6,500, where I started to buy back the stocks at that price. Unfortunately, this time the decision was wrong, where KKGI instead continued to down, until finally I had cut the loss at 5,700. When KKGI gone down to below 5,500 (5,300 to be exact), I started to thought to buy it again, but I didn’t do it as there was other coal stock that is more attractive, ie Harum Energy (HRUM), which at the time it was in the price of 6,400’s.

(Btw, my policy is only allowed me to hold one stock of a sector, or a maximum of two. So if you already hold Bumi Resources, for example, then you shall not hold Adaro Energy.)

Because my attention turned to HRUM, then I didn’t take a look to KKGI for a while. What a surprise, now it is in the position of 2,700, which I had never imagined that KKGI would going that far. What happen?

Based on the company's performance in the First Half 2012, KKGI recorded a decrease of 18.2% in its net profit, or the same as most other coal companies, which were also had their profits decreased. But in spite of the decline, KKGI’ performance was actually good, with a ROE that is still well-maintained at the level of 55.3%. On the other hand, the company is still expanding to add its coal mines, with the acquisition of five coal mines with a total land area of ​​33 thousand hectares in East Kalimantan, so the prospects are still attractive. In light of this, the current stock price should be at the position of 3,500's, which reflects PER of 10.0 times, and stable in that position. But instead, KKGI continuing to come down, even though the other coal stocks were starting to recover (BUMI, BORN, and BRAU could not included, as they are experiencing extraordinary events related to the conflict between Bakrie and Rothschild).

But there is a reason which explains the decline of KKGI. On August 29, the management of the company released a statement regarding the revised coal production target for 2012. The statement mentioned that, ‘although we have been gearing up our infrastructure capacity to cater for a much higher production volume this year, we believed that it is in the company's long term interest to take a more conservative approach right now and scale down production in a difficult market cycles such as the present.’

Look, if you notice, the above statement is a bit odd. I mean, everyone has already knows that the coal sector is now in hard time. So why KKGI’ investor relation had to say it bluntly to the public? CMIIW, but the job of investor relations is to explain good things to the public, isn’t it? For example, that the company is still operating normally, etc? But instead, the KKGI investor relation is ‘telling’ investors to get out of the stock.

Only a month later, on 25 September, KKGI once again issued an important statement, this time related to buyback shares. In the statement, there are analyzes related to the effect of the buyback on the main activities of the company. Here's the analysis:

The repurchase of shares will reduce the company's assets and equity. If the company uses all reserved funds for the repurchase at a maximum amount, then the amount of assets and equity will be reduced as much as Rp200 billion (btw, note that equity of KKGI on the First Half 2012 was only Rp632 billion, so the number of Rp200 billion are fairly large). The potential loss of interest revenue would reduce the company’s net income when the funds are placed in time deposits.

In essence, the announcement of the buyback was delivered in a similar language to the announcement about the revised target of coal production, which we have discussed above. So, I think someone is trying to kick everybody's out from this company. But what is the purpose? Well, what do you think?

But.. What if the management does really pessimistic about the future of KKGI business? Huh, I don’t think so. Okay, the sector of coal mining at the moment is sluggish due to the decline of coal prices, but the rise and fall in commodity prices, including coal, it's just a common thing, nothing special. In the long run, the power generator industry in all over the world will always need supply of coal. If the coal industry is feared to be insolvent entirely and will not turn on again, then how could the Bakrie Group desperately defending Bumi Resources from takeover attempts by Nathaniel Rothschild?

One more thing, on last October 8, the State Electricity Company aka PLN (Perusahaan Listrik Negara) had issued notes at a value of US$ 2 billion in Singapore. And in the prospectus stated that as at June 30, 2012, the company is building at least 34 units of coal-fired power plants, from the planned 45 units of coal-fired power plants, to reduce the company's dependence on oil fuels (we've discussed this). The reason is clear: Indonesia since 2007 is no longer an oil exporter, but the importer. But for coal, we still have many of it (about 21.1 billion tons of proven reserves in 2010).

For the full year of 2011, PLN using coal fuel with a share of 38.5%, and oil fuel with a share of 29.3%. Going forward, precisely in 2014, PLN plans to increase its use of coal fuel to 54.1%, while the use of oil fuel will be reduced to only 6.1%. The details can be seen in the following table.

Fuel (%)	2011	2014
Oil	29.3	6.1
Natural Gas	22.5	32.7
Coal	38.5	54.1
Geothermal	2.5	2.2
Hydroelectric	7.2	4.9
Total	100	100

So, for KKGI, which has been selling almost all of its coal to the export market, in the future they are also more likely to sell the coal to the domestic market. Because it should not only PLN, other industries which are also in need of coal, such as cement manufacturing, etc., will also be developed if the power supply itself becomes more abundant. So I think, it is strange that the management of KKGI looks like raised the white flag in running their business, and shows it openly to the public.

Now, are you saying that we could buy this stock? Since the movement of the stocks is not natural, and the outstanding sentiments are still ugly, then we probably have to wait. But if the other day this stock was forgotten, now we can take a look on it again.

Okay, then how about LSIP?

Unlike KKGI, I found that the story of LSIP is not too complicated, and so far the stock movement is also reasonable. This stock has had reached 3,000's as its highest position (3,175 to be exact) in April 2012. Afterwards, LSIP then down and now it is in a position 2,375, because of the company’s slowing performance in 2012. In the First Half 2012, LSIP recorded a decrease in net profit of 27.9%.

I had been collecting this LSIP in May 2010, or a few months before I met with KKGI. At the time the price was 7,500 (price before stocksplit, equal to 1,500 if converted to price after stocksplit), and the palm oil sector was in hike due to higher prices of crude palm oil (CPO), and the options in this sector were two, namely LSIP and AALI (Astra Agro Lestari), while LSIP was more attractive in term of valuation. A few months later, on March 2011, I sold LSIP to switch to a 'newcomer' who suddenly recorded significant growth, TBLA (Tunas Baru Lampung). Unfortunately TBLA’ good performance did not continue, so in September 2011, I’d back to LSIP, by bought it at 2,200.

In April 2012, I finally out from LSIP at 2,800, and did not bought it back, until now, because I saw that the oil palm sector is sluggish, just like coal. But again, I still considered that LSIP is the best stock in the palm oil sector. So if later the CPO prices starting to rise again (the current price of CPO in Malaysia is RM2,471 per tonne, still low), then you have to look at LSIP first.

Then what about the future outlook for palm oil sector? Well, we've discussed it in the previous article, please read it again. So do you think if we could purchase LSIP at current price? Well, not yet. Possibly LSIP could still down further, given its position at this time should be lower if the JCI was not in a position 4,300's. The ideal entry position is at or below 2,000, where LSIP might down to that position when the bullish period of JCI ends.

Original article was written in October 18, 2012