Analysis of IPO of Soechi Lines

PT Soechi Lines is a company that I myself only heard its name recently after the company hold an IPO. However, the IPO may be interesting because the company engaged in shipping, and we know that the stocks in the marine sector continues to move up in recent months, driven by positive sentiment arising from the plan and the vision of the Government of Indonesia, under President Jokowi, to make Indonesia as one of the 'axis of maritime' in the world. So the question of course, can we join the IPO?

The history of Soechi Lines began in 1977, where a businessman named Paulus Utomo, assisted by his friends and brothers, won the tender from Pertamina to provide vessels for oil transportation on the waters around Singapore and Batam, Riau Islands province. Three years later ie in 1980, Mr. Paulus established PT Armada Bumi Pratiwi Lines, which is engaged in vessel chartering, with Pertamina as its main customer. The business continues to grow over the time, so Mr. Paul founded several PT’s (outside PT Armada) which all engaged in the business of vessel chartering.

Later in 2009, Mr. Paul decided to go to another venture, by building a shipyard on the island of Karimun, Riau Islands (still close to Singapore and Batam), so that his vessel companies could build or repair their own ships and vessels. This expansion is because the management has seen that the Government of Indonesia began to give special attention to the shipping industry in the country, by introducing the cabotage principle, where all the users of marine logistics services (mostly oil companies) are required to use Indonesian-flagged vessels only. And as local shipping companies, the group is certainly benefited from the policy.

And in 2010, PT Soechi Lines was established to be the holding company of the nine companies which are engaged in shipping, and another company that engaged in shipyard, so Soechi in total has ten subsidiaries. Once consolidated into one holding, Soechi owns and operates a fleet of thirty three vessels of various sizes for the transport of liquids, such as crude oil, fuel, palm oil, liquefied gas, and liquid chemicals. The group serves the South East Asia, India, and the Middle East. While for its shipyard, the company has one tugs and two barges.

Although the current size of the company is clearly much larger than when it was founded in 1980, but the majority of the company's revenue, in this case about 60%, still comes from Pertamina only. But it could be explained because in the locations where the company operates the most, ie Batam and Singapore, Pertamina is the only holder of the right from the Government to undertake export and import activities of oil. But Soechi keeps trying to diversify its revenue by offering logistics services for Pertamina business partners, such as Chandra Asri (a petrochemical company) and ConocoPhillips (oil supplier for Pertamina), and the same services for oil palm plantation companies who are headquartered in Singapore, such as Wilmar, Golden Agri, and Asian Agri. However, since Soechi is not a big shipping company, including for the size of local players (some giant shipping companies in Indonesia are Berlian Laju Tanker/BLTA, Samudera Indonesa/SMDR, Humpuss/HITS, and Arpeni Pratama Ocean Line/APOL), then the financial performance of the company is inevitably dependent on Pertamina. But since Pertamina itself is the biggest holder of the government mandate for exports and imports of oil, so I think it was not much of a problem.

Then how about the future prospects of the company, particularly in terms of development plans in the maritime sector under Jokowi’s administrate?

In his presentation at the 2014 APEC Forum in China, Jokowi said that Indonesia has plan to develop 24 large ports, and hundreds of smaller ports from Aceh to Papua. Jokowi stated that the Government of Indonesia (GoI) will build new ports and develop the existing ones, until the archipelago, from the west end to the east, will be connected by lines of ships. This concept is called 'marine toll road'. The GoI has a vision to build super-large ports that can serve giant ships at six locations namely Aceh, Jakarta, Surabaya, East Nusa Tenggara, Maluku and Papua, so the big ships from Jakarta (which transport fuel, cement, etc.) can be directly went to Papua (through the sea line that connects the port of Jakarta and Sorong) without the need to transit in Makassar or Moluccas.

The six major ports that are connected each others, will be connected further to hundreds of smaller ports. So the load of cement that has landed at Sorong, for example, can be transported further using smaller ships to Nabire, Jayapura, and other cities on the Island of Papua. By this way, the transportation costs of the cement will be much more efficient (because only need to transit once at Sorong), and consequently the price of cement in Papua will no longer be Rp1 - 1.5 million (about US$ 100 – 150) per sack as it is today, but expected not to be too different from the actual price, ie Rp50,000 – 70,000 (about US$ 5 – 7) per sack.

And now, as a shipping company specialized in transporting liquid goods (crude oil, fuel, etc.), the management of Soechi saw the opportunity from the Government’s plans. Because different with cement, for example, which can be transported using the aircraft from Java to Papua Island, the fuel, in large quantity, can only be transported by ship. And all this time Pertamina itself is still experiencing difficulties in distributing the fuel, especially to areas outside Java that is 'blocked' by the sea, because of the lack of adequate port facilities. As you know, some of the existing ports like Tanjung Priok, Tanjung Perak, and Belawan, their capacities are already full, so Pertamina itself almost did not get a space.

So with the construction of new ports, including increasing the capacity of existing ports, then it will open up space for Pertamina to more easily distribute fuel across the country, from Aceh to Papua, this time by large load for each delivery (Pertamina has been able to send fuel to Papua, but only with small quantities for each delivery and must through many distributors, which makes the fuel price became so expensive in Papua, around Rp20,000 - 40,000 per liter). While Soechi? Just providing the ships. Although Soechi is not a large vessel company, including not the only shipping partner for Pertamina, but the position of the company that has 30 years of partnering with Pertamina, allows Soechi to win the future tender, if Pertamina later need additional ships.

Seeing the opportunity, Soechi then staged an IPO in which most of the proceeds will be used to purchase new vessels. Actually, after the company get the proceeds (at the price of Rp600 - 800 per share, Soechi will reap about Rp1.5 – 2 trillion), then it does not mean that the company can immediately use the funds to increase revenue. Because even though the process of buying a new ship only takes shorter time than setting up a factory, for example, but currently the government is not yet started the construction of the ports. And the construction of ports could take years. For example, the construction of the Kalibaru Port that is currently running, is estimated to be completed in 2.5 – 3 years from its ground breaking on last March 22, 2014.

The point is, still, despite the shipping sector looks very attractive after Jokowi stated his vision to build marine toll roads (or whatever it's called), but that vision would take time to be realized, even though the President wants to work quickly. And because the new ports are not yet ready to operate, then Pertamina also do not need new ships yet, and that means that Soechi can not directly obtain contracts for its brand new ships (in contrast to Pertamina, to obtain a contract of oil from Chevron, Exxon, etc., then Soechi should fight tight with many competitors, including Wintermar/WINS which is also a oil carrier specialist).

Thus, although I’m also optimistic that the maritime sector under the new Indonesian Government will growing, but in the end we still have to look at the track record of the performance of Soechi as a shipping company, to assess whether its shares worth to buy or not. Because if you only look at the prospects, then you have to remember that those prospects will not be realized within one or two days.

And fortunately, unlike BLTA that was destroyed by heavy debts, Soechi is relatively a healthy shipping company with DER of only 1.2 times during the first semester 2014 (Soechi debt is still slightly larger than its equity, but for a transport company, it's natural), and even then the company directly intends to reduce its debt in which 25% of the proceeds from its IPO, which means around Rp400 - 500 billion, will be used to repay a portion of bank debts.

But in terms of profitability, well, Soechi only making large net profit since 2013 to the present. Before that, the profits are very small, even it was a loss in 2010. Here's more:

Year	2010	2011	2012	2013	2014*)
Equity	47	54	83	138	174
Revenue	25	65	71	106	55
Net Income	0	3	3	30	16
ROE (%)	0.1	6.3	3.3	21.8	17.9**)
*) until first half
**) annualized

Take a look, you’ll see that Soechi does not have an impressive track record, where the company's performance only stood out in the last two years, and even that with relatively small ROE, ie only 18 – 22%. However this could because that in 2010 and 2012, not all the subsidiaries of Soechi Group are consolidated into the parent company because, as already discussed above, PT Soechi Lines itself was established in 2010. But it is clear that from the latest balance sheet composition and performance, especially when compared with other listed shipping companies where they usually have a mountain of debts, with inconsistent profits, then Soechi’ fundamentals are quite good.

And what about the shares?

As mentioned above, Soechi’s shares will be released at a price of Rp600 - 800 per share. We take 600, then the company will make proceeds of Rp1.5 trillion. Soechi’ equity position on June 30, 2014 was US$ 174 million, or exactly Rp2 trillion, assuming the exchange rate of US$ 1 = Rp11,500. Thus, after the IPO, the equity value of the company would be Rp3.5 trillion. Divided by 8.6 billion of outstanding shares, the book value of the company will be Rp414 per share. Because the share price was Rp600, then its PBV = 600 / 414 = 1.5 times. Well, what do you think? For me, taking into account the past financial performance of the company, while on the other hand the name of ‘Soechi’ is not a well known brand, then this is a fair valuation although could not be said to be too low.

However, if you believe that 'Jokowi Effect' related to maritime sector will continue to persist until some time in the future, then the price is obviously low. If we look at the experience of IPO of Waskita Karya (WSKT), where the shares had successfully skyrocketted following the hike of any other construction stocks at the time, then Soechi can also experience the same thing.

So in conclusion, this stock is pretty decent to buy if the price is 600 or slightly above. The bookbuilding for the stock was already closed, so if you are interested then you could only buy it on the market, at December 2. I do not know whether Soechi will fly or not, but by looking at the performance of the company, the valuation of the stock, and especially the prospect of its business, then there was almost no reason for this stock to go down. We'll see.

PT Soechi Lines, Tbk

Rating of Performance on First Half 2014: A

Rating of Stock at 600: AA

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