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:
- Building a water supply for industrial area of
Krakatau – Posco. There is no exact schedule about the completion of the
project.
- 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.
- 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.
- Building a blast furnace mill. The
construction has began in 2011, but its completion still have to wait
another year, ie 2015.
- 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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