Toba Bara Sejahtra: Return of Coal?

Toba Bara Sejahtra (TOBA) became the first coal company in the Indonesia Stock Exchange which has released its financial statements for the period of first quarter of 2014, and its net profit of US$ 7.7 million (profit attributable to equity holders of the parent entity) cause the stock to be too attractive to be ignored, because the profit grew doubled over the same period in 2013, and relfects ROE of 27.6%, quite delight for a stock that is currently valued at only PBV 1.3 times.

TOBA is the owner of three coal mining which are all located in Kutai Kertanegara, East Kalimantan Province. In 2013, the company produced a total of 6.5 million tons of coal, so it was categorized as a middle class coal company. TOBA founded by one of the Indonesian military figure, General Ret. Luhut Pandjaitan, who in 2004 went into the field of business by establishing Toba Sejahtra Group, which later became the holding of several companies in the field of coal mining (TOBA), oil and gas, oil palm plantations, and power plants. However, of the many companies it was just TOBA that listed on the stock exchange.

Outside coal mining, the company also has an oil palm plantation which is also located in East Kalimantan, with an area of concession of ​​8,600 hectares. But the plantation may contribute to TOBA revenue within the next two or three years, as the estate is still in the process of planting.

Developments of the company since first operating in 2007 are somewhat interesting. In 2007, TOBA operated its first coal mine through its subsidiary, Indomining, and only generating revenues of US$ 5 million. In 2008, the company added its second coal mine so the production volume increase significantly to 800 thousand tons, and consequently its revenue rose sharply to US$ 49 million. In 2011, TOBA opened its third coal mine, while the existing coal mines also has begun producing coal at large volume, so that in that year the company produced a total of 5.2 million tons of coal.

And driven by the rise in coal prices which reached US$ 120 per tonne (2011), TOBA successfully earned revenues of US$ 498 million, while its net profit reached US$ 58 million. This achievement is extraordinary, considering the position of equity/net capital of TOBA was only US$ 59 million at the time, so its ROE reached nearly 100%. Possibly because of this achievement Mr. Luhut earned a lot of money, and returns to politics by supporting Jokowi to run for the president.

Unfortunately entering the year of 2012, coal price began to fall, and consequently TOBA’ net profit plummeted to only US$ 3.2 million which is primarily due to the high cost of production, because the company is still in the stage of construction of various infrastructure development for a more efficient performance. In 2013, coal prices are still down, but a significant increase in coal production volume which reached 6.5 million tons (compared to 5.6 million tons in 2012), plus the completion of several facilities such as hauling road, second underpass, and workshop for heavy equipment at the mine site, causing TOBA’ performance to be more efficient, and consequently its profit still rose to US$ 18.5 million.

And in 2014, the price of coal began to rise to around US$ 85 per tonne, from previously US$ 67 - 70 per tonne in 2013. Because TOBA's coal production volume is still rising continuously (the target is 7.5 million tonnes for the year 2014), then company’s net profit again soared, even though has not yet break the record of net profit in 2011 (if annualized, TOBA’s profit in 2014 was approximately US$ 31 million). But the interesting thing is, at the moment, TOBA is working on another infrastructure project: A coal processing plant, which once again is expected to reduce the cost of coal production. This project will be completed and operational by mid 2014.

If discussed point by point, here is an interesting points of why this TOBA is worth to be collected:

1. The first of course its low valuation. At the price of Rp800 per share, TOBA’ PBV was 1.3 times (only accounts the equity to shareholders, outside the non-controlling interest), and this is one of the lowest valuation in the coal sector. If considering its ROE that reached 27.6%, which is likely to be even higher if coal prices continued to rise as they are now, added with the increasing efficiency of TOBA’ financial performance, then the company's equity value will increase sharply so that its PBV will be less than 1 times.
2. Unlike some large coal companies who were in debt, TOBA’s balance sheet is relatively clean , except for bank debt of US$ 47 million, and even the numbers continue to decrease.
3. TOBA is fairly generous in dividends, which for the fiscal year of 2012, the company paid dividend of US$ 0.0028 or Rp31 per share, which is 87.5% of TOBA’ net profit. The company could spend almost all of its net income as dividends because they do not have any expansion plans, but only continue to increase the production and efficiency of the coal mines that already exist. Given that TOBA’ profit in 2013 rose to US$ 0.0092 per share, then 87.5% of them were US$ 0.0081, or equivalent to Rp89 per share, or Rp80 after tax. This is a huge number of dividend considering that the current price of the stock is only Rp800 per share (the yield is 10% after tax). For the (future) fiscal year of 2014, the dividend should be increased to doubled as the company’s profit returned to normal.
4. There is a potential for additional revenue within a few years from oil palm plantation.
5. The quality of management is so far so good, one of which can be seen from TOBA’ financial statements that are always released quickly in each quarter. Including Mr. Luhut also has a good reputation as a sport athlete, military leader, politicians (he once a minister under the President Gus Dur), and businessman.

However, there are alse several less positive points related to this stock, including:

1. The shares are illiquid. When the company held an IPO in July 2012, the number of shares released to the public was 211 million pieces, at a price of Rp1,900 per share. After the price continue to fall in almost two years later, many of these shares are bought back by the associates of Mr. Luhut (including through his son, Davit Togar Pandjaitan), so that the remaining shares held by the public is only 50 million shares. If you notice, there are many illiquid stocks because the price is low (so that in the end when the price goes up, the shares will be liquid as well). But for TOBA, it is not liquid because the number of shares that held by the public ar actually very little. There is a possibility that the price of the stock would not going anywhere (not increasing, but also not going down), including if later the company announced a payment of dividend, because of this liquidity problem. So, this stock may only be suitable for those of you who like dividends. I believe that the majority shareholders of TOBA also do not care about the price of shares on the market, as long as they received dividends.
2. The company are too conservative without a plan to add its coal mines portfolio, and this is in contrast to many other coal mining companies which are diligently pursuing additional revenue by acquiring new mines.
3. There is issue of the increase royalties to be paid (to the state) by coal companies, and also the ban on the export of low-calorie coal (below 5,200 kcal per kg). For the ban of export, it does not matter because TOBA’ coal is of 5,500 to 6,250 kcal per kg. But for royalty issue, if it actually increased, of course could depress the company’s profitability.

The conclusion? Well, unless you can commit to hold the stock in the long term to achieve the benefit of dividends, then TOBA may only be used as an alternative choice for investment in the coal mining sector. But as the performance improvement of the company looks quite promising as driven by the increase of coal prices, then we may hope that the other coal companies could bring their financial performance into their tracks. There are several coal companies who had a very good financial performance in the past, such as United Tractors (UNTR), Tambang Batubara Bukit Asam (PTBA), Harum Energy (HRUM), Indo Tambangraya Megah (ITMG), until Resource Alam Indonesia (KKGI). If the coal sector is recovering, then these five companies should also not going to have difficulties in increasing their net profit.

So, for those of you who may still hold the stocks of coal since 2011, then probably your 3-years of waiting will be eventually paid off, so for now do not think to cut loss your stock. As for you the bargain hunters, if you are not interested in this TOBA then you can consider another coal stocks, just wait until they release their financial statements respectively.

PT. Toba Bara Sejahtra, Tbk

Rating of Financial Performance in Q1 2014: AA

Rating of Share Price at Rp800: A

Note: There is a dispute about the precise price of coal at the moment, and it could not be avoided because, first, every coal mining company sell their coal at different prices depending on quality of the coal (calories, ash content, and water content), and second, in contrast to the world’s CPO price which has its benchmark on the Bursa Malaysia (Malaysian Commodities Exchange), the world’s price of coal does not have a single benchmark. So, if based on data taken from operational reports of TOBA and UNTR, the current coal price is around US$ 85 per ton, and it was higher than in year 2013, but other information resources may give different figures.