Steel Pipe Industry of Indonesia

Since listed on the Stock Exchange on February 22, 2013 at the price of Rp295 per share, the stock of Steel Pipe Industry of Indonesia or Spindo (ISSP), hadn’t gained a penny but directly dropped.. and continue to drop until it touches 131 as its lowest point on January 2014, before then rebounded and currently closed at 168. If you look at the business model of the company, which makes and sells steel pipes, ISSP is not ideal for a long-term investment as the company’s financial performance in the future can be easily affected by the fluctuations in raw material prices, the weakening of Indonesian currency (Rupiah), etc. However, if you look at the discounted price of the shares, the company’s conservative management, as well as the company's recent performance that is quite good, then ISSP is too good to be ignored. Okay, here’s my review.

ISSP is the largest steel pipe manufacturer in Indonesia that is based in Surabaya. The company sells stainless and carbon steel pipes of various shapes and sizes for industrial customers, construction, oil and gas, and automotive factories. Besides selling steel pipes, ISSP also provide services of steel cutting and coating. By year-end 2012, the company has five factories which three are located in Surabaya, while the other two are in Pasuruan, East Java, and Karawang, West Java.

Although the company has been running since 1971, but until today they are focused on the manufacture of steel pipe solely, and did not explore any other areas such as build a steel mill, or make products other than steel pipe, like steel wire, steel for construction, and so on (there are services of steel cutting and coating, but its contribution to the company's overall revenue is small). But from the standpoint of an investor, this is actually a good thing because it means that the company could focus on a single type of business fields. And despite most of common people doesn’t know about ‘Spindo’, but among industry players, Spindo already well known as a steel pipe specialist.

In the above I said that the steel pipe business is very vulnerable to rising prices of steel sheet as the raw material for making pipes, the fluctuations of Rupiah exchange rate (because some of the steel sheet are obtained from imports), and the development of the market of steel pipe itself. So I was not surprised to see that in the year 2009, ISSP suffer losses of Rp308 billion (about US$ 30 million) due to the effect of the global crisis. But other than the year of 2009, the company's net income and equity continues to grow to this day.

Then about the prospects of the future, when the company held its IPO, the proceeds are used to build a new steelp pipe plant in Gresik, and to increase the capacity of the existing plants in Karawang and Pasuruan. However, because the constructions are not completed, then so far the results are not yet visible. ISSP’ good performance in the last two years is due to the lower prices of steel (raw material to make steel pipes), thus increasing the company's profit margins (the one that affected negatively because of this is Krakatau Steel/KRAS, which is one of the suppliers of steel sheet to ISSP). Actually, I’m not too interested in the prospect of ISSP only because they are setting up new plants, because we do not have clue at all about the future development of the steel pipe industry. I mean, it would be useless if later the plants are ready to operate but the demand for steel pipes already decreased, or if the price of steel sheets rose.

But what makes this stock attractive is its valuation. If you acquire a 100% stake in ISSP at its current price, ie Rp168 per share, then you will spend Rp1.2 trillion.. to acquire net assets totaling Rp2.0 trillion. And the good news, the majority of ISSP’ assets are current assets such as account receivables, inventory of steel sheets, invesntory of steel pipes that ready for sale, which could be easily liquidated at any time. So like I said about Petrosea (PTRO), if you buy ISSP at the current price, then you're already in profit without the need to expect that the company will continue to made a great net income as it is now (in the first quarter of 2014, its ROE was 17.0 %, large enough for the size of a manufacturing company in Indonesia).

And if you buy a 100% stake in ISSP at its lowest price, namely Rp131 per share, then you will spend Rp941 billion to acquire net working capital (ISSP’ current assets after current liabilities) worth Rp951 billion, not including fixed assets such as plants, vehicles, etc.. This reminds me when in 1962, Warren Buffett bought Berkshire Hathaway at PBV of 0.8 times based on the value of net working capital alone, beyond the fixed assets owned by the company. So yup, ISSP is really cheap.

The other thing is, a price of a stock is usually low only if the company is troubled, but for ISSP, the story is totally different. In first quarter of 2014, the company's revenues rose 24.5% aka quite significant, and its net profit was also increased. I do not know about the company's performance in the future, but if based on its latest performance, the stock price is too low. ISSP current price should be at the level of Rp250 per share or above.

So, although ISSP may not ideal for a holding period of, let say 2 – 3 years, but in the shorter term ISSP might offer considerable gain. The movement of the price, since its lowest point on January 2014, is also showing a good positive trend. Some people say that ISSP is getting pressed by big dealers so that price was down, but as long as it is undervalued, then I do not care.

However, because since the beginning, the company's performance can fluctuate from time to time, then if you are interested in this stock you better use a little money only, and do not hold it too long. Some of my friends also said that ISSP’ low price may reflecting its poor outlook, but well, hopefully it was just a pessimistic sound.

PT. Steel Pipe Industry of Indonesia, Tbk

Rating of Performance in First Quarter 2014: A

Rating of Stock at 168: AA