On numerous occasions with Mr. Lo Kheng Hong, he told me that there are at
least two coal stocks that are very attractive for investment because of their low
valuations. They’re Bumi Resources (BUMI), and Resource Alam Indonesia (KKGI).
For BUMI, well, I personally has a slightly different opinion. But for KKGI,
this stock is indeed interesting, and it's not because of the 'romantic story
in the past' in which KKGI had gave us big profit when it surged to Rp8,000’s per
share in early 2012, but due to its low valuation, its bright outlook, and its healthy
balance sheet. Okay, here we go!
Established in 1981, KKGI was a manufacturer of high pressure laminate with
its plants in Pontianak, West Kalimantan, and Palembang, South Sumatra. In 2006,
the company swerved into the coal sector by running its first coal mine located
in East Kalimantan through its subsidiary, PT Insani Bara Perkasa (IBP). A year
later, ie in 2007, KKGI successfully produced 178 thousand tons of coal.
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| The logo of KKGI. 'RAIN' is abbreviation of Resource Alam Indonesia |
In the next few years, along with the increasing activities of coal production
and exploration, KKGI’ coal production volumes continue to increase until 4.2
million tonnes in 2011, while the proven coal reserves had increased to 80
million tons, making it enough for at least twenty years to come.
But in 2012, the coal industry began to sluggish due to lower selling
prices of coal, from US$ 110 to 65 per ton, so that the revenue of KKGI was
fell, as well as its profit. And the conditions continued until 2013. However,
during the period of two years (2012 to 2013) the company continued to expand its
business as usual, such as: 1. Built the infrastructure of roads and ports for
coal transportation, including setting up three subsidiaries engaged in the
field of mine infrastructure, 2. Continuing exploration, and 3. Adding mine
portfolio by acquiring two coal mines outside the existing one.
Special to the third point, in 2013 KKGI acquired two coal mine companies
in East and Central Kalimantan, ie PT
Kaltim Mineral and PT Loa Haur,
so KKGI now has three coal mines in three separate locations. So far both
Kaltim Mineral and Loa Haur are still not operating because the management was
still waiting for a better coal price, but the two mines have been explored and
has proven reserves of 40 million tons of coal, and increasing. If the selling
price of coal in 2014 increased to US$ 82 - 88 per tonne as expected by the management
of KKGI, then the mine of Loa Haur will kick off its digging with a target
production of 1 - 1.5 million tonnes of coal for the year 2014. If Kaltim
Mineral is still taking care of some licensing to operate, then Loa Haur is already
fully ready for production.
So you could say that if the coal prices eventually recovered to at least US$
82 per ton (do not need to return to US$ 110 like the year of 2011), then the
revenues and profits of KKGI will jump significantly and it’s not only because
of the increased profit margins, but also due to the increased volume of coal
sold. The company itself expects 5.7 million tonnes of coal production volume
in 2014, surged from 4.5 tons in 2013, and it only comes from mines of Insani
Bara Perkasa that already in operate (not including additional production
volume from the mines of Loa Haur).
Okay. Based on the above review you can see that KKGI is interesting
because it offers a leap of growth of profit when coal prices later recovered. But
of course, it made KKGI not different with any other coal companies that listed
on the stock exchange, that are also depend on coal prices. However, here are
some other things that make KKGI is different:
- The management is so conservative where KKGI
has no bank debt, bonds, or the like, but still, they were able to acquire
two coal mines using the cash profits of the existing mines (Insani Bara
Perkasa). The position of the company’s balance sheet that is very
healthy, is automatically guarantees that if coal prices began to recover
later, the company's net profit will jump with ease.
- KKGI has a little amount of cash, which it
means that the company always empower its whole assets, and not letting
the idle assets. The position of current and non-current assets are tend
to be balanced, and there are no assets that have no relations with the coal
mining industry.
- The company business is concentrated only in coal
mining. And compared to other coal-related-industries such as the shipping
of coal, mine contractors, or power plants, the coal mines offer the largest
profit margins even though it was reduced by the royalties to the
government, which continues to rise each year.
- Unlike some pure coal mining companies such
as Indo Tambangraya (ITMG), Harum Energy (HRUM), and Bukit Asam (PTBA)
that pay very huge dividends each year (which means that the managements
were satisfied with the existing coal business and not eyeing further
growth for the company), KKGI only distribute dividends in a reasonable
amount, which is about half of its annual net profit, while the rest is
used to develop the company. If you notice some good large corporations
like Astra
International (ASII), Bank BRI (BBRI), and Semen Indonesia (SMGR),
they also pay dividends in a reasonable amount (roughly half the company's
profit), so it could be said that they reward the investors by paying
dividends, but still pursuing growth opportunities by reinvest some of
their net income.
Another thing, the management of KKGI sets aside some of its cash to buy back the company’s shares in the
market. So far, the number of KKGI’ outstanding shares has been reduced from 1
billion to 969 million shares, because the company has bought 31 million shares
from the market. Technically, a buy back (of shares) cause an increase in the
percentage of investor’s ownership over the company. To put it simply, if you
own 1 million shares of KKGI, then prior to the buy-back, you are the owner of
0.10% of the company, since the number of KKGI’ outstanding shares was 1 billion
shares. But after the buy-back, then the number of your shares is still 1
million, but the percentage of your ownership of the company increased to 0.11%,
since the number of KKGI’ outstanding shares has been reduced to 900 million.
If we use the example of Warren Buffett, he would really like if the
management of Coca Cola or American Express implement the buy back, because it
would make Berkshire Hathaway's ownerships in the two companies increased by
itself without the need to buy more shares. Although the equity of Coca Cola
will be slightly down (because the company would spend some money to buy the
shares), but it did not really matter because in the end the equity will increase
in line with the company's net profit.
Then what about the valuation?
In terms of quality of fundamentals, KKGI is one of the best coal stocks in
IDX, coupled with PTBA, ITMG, and HRUM, and also the smallest among the four so
it offers a better long-term growth prospects (and, therefore, the company only
pay decent dividends). When the coal sector experienced its heyday in late
2011, KKGI performance was the best among all coal companies so its share
prices continue to rise until reaches a very, very optimistic level, ie Rp8,000’s
per share. I still remember, its PBV was more than 10 times at the time.
So what about the current price? Well, at the price of 1,570, KKGI has PBV 1.8
and PER 7.6 times, and its dividend yield is 6.4% (the company distributing the
dividend of Rp100 per share, the cum date is June 26). Actually the price is
not low enough given the prospect of future performance of KKGI is still relies
on the development of coal price, while in the First Quarter 2014, the net
income of the company was still down.
But when I tried to buy this stock at price of Rp1,100 per share (the PBV
is below 1.5 times), I was not succeed, possibly because: 1. The buy back
policy has automatically made the shares available for sale (in the market) to
be much less because the management would not resell these shares, and
consequently the bid of the stock will be larger than the offer, so the price
is maintained at a not-too-low-level, and 2. KKGI is still a profitable company
with a large rate of return on equity (ROE), ie 24% in the First Quarter, 2014
(when its profits are still down). While in 2011, the ROE was recorded at 69%.
The point is, KKGI may not be valued too low even there are other coal
stocks with lower PBV, PER, or dividend yield. If you are interested in this
stock then you might accumulate at the price below Rp1,500 per share (just try
it). But if you like to hit the stock at the current price, then it's worth to
wait until the company announced that its mining of Loa Haur has started the production.
Target price? Let say 2,000 before the end of 2014. But if KKGI successfully
make an increase in profit in the next second quarter of 2014, then surely we
can raise the target.
PT. Resource Alam Indonesia, Tbk
Rating of Performance in First Quarter 2014: A
Rating of Share Price at 1,570: A
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