Trada Maritime

In the first quarter of 2015, Trada Maritime posted a net profit (attributable to the shareholders of parent entity) of US$ 0.4 million. Although the figure has risen significantly over the same period of the previous year, but it is very small compared to the value of the company's equity of US$ 86.7 million. However, an interesting story about this TRAM probably not related to its financial performance, but rather related to its share price that currently slumped at the level of Rp50’s per share, or extremely low compared to its peak price (in the last one year) which was Rp1,900 per share. If you read the company’s financial statements that, although don’t show good fundamentals but also not that bad (the company still posted a profit, and the equity was still positive), and its PBV at current prices is only 0.5 times, then as a bargain hunter, you may ask: Is there an opportunity here?

TRAM is one of many companies of shipping and marine transportation service in Indonesia. The company was founded in 1998 and began its commercial operation in 2000, by leasing a floating storage and offloading (FSO) vessel to an oil company. In 2003, the company bought a tanker to transport liquid cargo. In 2008 the company again increased its fleet with some boats and barges for transport dry cargo such as coal etc. Also in 2008, the company went public on the Indonesia Stock Exchange. At the end of 2014, TRAM operates a total of twenty vessels comprising of five FSO vessels, five support vessels for the FSO, three tankers for liquid cargo, five bulk carrier, one passenger ship, and one liquid natural gas (LNG) carrier vessel. Currently TRAM has several long-term customers who are mostly oil and gas, and coal companies.

After reading the above, you may not see anything special from this TRAM. But here’s the story: TRAM has been hit by at least two extraordinary events that disrupt the company's operations, which ultimately led to a decline in its financial performance in the last few years. Here they are:

1. Fire accident of 'Lentera Bangsa' vessel

In June and July 2010, TRAM obtained a loan from the International Finance Corporation (IFC) and the Bank of Tokyo - Mitsubishi UFJ for total of US$ 50 million, to finance the modification of the FSO vessel 'Lentera Bangsa' which belonged to the company. The company would later pay the debt by way of installments every three months. But in September 2011, the vessel was caught on fire, so that it stop operating. As a result since September 2011, the company failed to meet its obligations to pay its debt to the IFC and Bank of Tokyo.

Prior to the fire, the vessel had been insured to PT Asuransi Dayin Mitra, Tbk (ASDM) and PT Asuransi Purna Artanugraha, with the value of coverage of maximum US$ 75 million. However, since the event of fire until today, the coverage have not been paid by the insurance company. The problems became complicated after the IFC and Bank of Tokyo, in May 2014, sent a warning letter to TRAM to immediately pay its debts, but the management of TRAM managed to convince the creditors that the problem lies at the unpaid insurance claim. Until now, TRAM together with IFC and Bank of Tokyo are still in a position of waiting for the insurance companies to resolve the claim as soon as possible. Management of TRAM has filed the claim at June 2014.

2. The case of oil smuggling, which involves 'Jelita Bangsa' vessel

On June 2014, the 'Jelita Bangsa' FSO vessel belonged to TRAM was detained by customs officers in the waters of the Riau Islands, for (allegedly) moving the cargo of crude oil to another ship illegally. As a result of this case, the vessel stop operating.

The authorities immediately investigate the case. And the results, based on the companys’ financial statements for the first quarter 2015, the captain and two crew members of the vessel became suspects, but TRAM as the owner of the vessel was free of charges because the three suspects acted beyond the authority given by the company. However, until today the vessel Jelita Bangsa is still detained by the authorities as evidence.

Okay, if you read the above paragraph thoroughly, you would find some questionable things about the two events. The first, Lentera Bangsa was caught on fire on September 2011, or nearly four years ago, and since that time the company stopped paying debt to IFC and Bank of Tokyo. Then why the management of TRAM did not immediately submit a claim to the insurers? Why do they have to wait until June 2014 to submit the claim? (and even that’s because the company received a warning letter from IFC in May 2014, a month earlier). If management of TRAM had filed a claim to the insurance companies in September 2011, ie immediately after the fire, then the claim must’ve been paid at the moment. But because TRAM submit the claim on June 2014, then at the moment the insurers are still examining the claim, because a sum of US$ 75 million is certainly not a small amount to be paid right away.

Anyway, because TRAM still have not received a payment of claim from the insurers, then in its financial statements since 2012, TRAM posted non-operating losses due to the estimated impairment of assets ('asset' here is the Lentera Bangsa vessel), of US$ 12 million in 2012, and US$ 23 million in 2014, so the total is US$ 35 million. Coupled with the costs related to ‘disputes’ with IFC and Bank of Tokyo, the company posted losses over the last three years, so that TRAM’ net equity value shrinks from US$ 152 million at the end of 2011, to only US$ 86 million in the first quarter of 2015 (were the management deliberately let it happens?).

So now it seems clear that when the claim is eventually paid, net equity of TRAM would increase, and the valuation of its stock that already low at the moment (the PBV was only 0.5 times at the price of Rp55 per share) would be much lower. Yet once again the question, why the management of TRAM had not had filed a claim to the insurers until June 2014, or nearly three years after the events of the fire?

The second, related to the case of oil smuggling involving the vessel Jelita Bangsa. When the management stated that the company was not involved in the case, then why the authorities still detain the vessel? In the public expose held by the company to explain the problem, the management did not mention any particular effort to immediately release the vessel Jelita Bangsa so that the ship could be back in its commercial operation, but they would only wait for the law process. The management only emphasizes the point that, although the ship isn’t in operation, but its contribution to the company's overall revenue is only about 5%, aka not too large. However, the fact is in the first quarter of 2015, TRAM’ revenue fell 44.2% over the same period of the previous year, and it certainly could be explained: If I was one of TRAM’ customers, I would cut the contract and move to another shipping company. I certainly will not take the risk of 'involved' with the cases of smuggling or anything which is attributed to the company.

Outside the two issues that have been discussed above, the more interesting story about TRAM is related to its share prices in the stock market. As already mentioned above, in September 2011, TRAM had a force majeure where the vessel Lentera Bangsa, which was one of the company’s major and most expensive fleets, was caught on fire. Normally when a company suffered a disastrous event like this, its stock will fall. But for TRAM, it was the opposite. In September 2011, after sideways long enough in the range of 550 - 600, the stock suddenly flew until reach 1,000 in January 2012, with a very large volume of transactions. With PBV that had been more than 6 times, while the company has just experienced a force majeure, and the financial performance of TRAM wasn’t special at all, it is clear that the increase of the stock is not reasonable. Moreover, the volume of transactions is too large (up to 100 million shares per day) for a stock that had never classified as ‘representing a company with excellent fundamentals and/or bright future prospects’. Since 2010 until today, every time I read the latest financial reports of the listed companies on the Indonesia Stock Exchange, TRAM has never passed the screening.

However, TRAM was able to stay at the price range of 800 to 1,000. When the company eventually posted a huge net loss at the end of 2012, instead of going down, the stock rose further until reach 1,400 (nonsense!). Entering 2013, the company's financial performance has not yet improved. But still, TRAM was still rising further to now above 1,800. Because the volume of daily transaction was very large, then the cost of the net trading fee to be paid by anyone who buy and sell the stock reached about Rp500 million per day, or Rp 100 billion (US$ 8.5 million) per year! (assuming that in one year there were 200 trading days). The question is: Who would spend so much money only for trading a stock of such a small company, while TRAM’ fundamentals weren’t good at all and the price was very very expensive? What's in it for him?

And finally, in June 2014, when the stock already at the level of Rp1,800’s per share, the company had its second and third events: 1. The arrest of vessel Jelita Bangsa by customs in waters of Riau Islands (continued with the termination of the lease contract from Pertamina, which was a service user of the vessel), and 2. The management of TRAM received a letter from IFC which warned the company to immediately pay its debt. Responded to these incidents, the IDX suspended the trading of the stock. When the suspension was finally lifted in November 2014, TRAM started to slashes mercilessly! By dropped more than 20% almost every trading day.

However, when a stock dropped insanely, then based on experience, regardless of fundamentals and valuation, at a certain time it would rebound. And that's exactly what happened to TRAM. When the decline eventually reached 400’s (from previously 1,800’s), it rose significantly on certain days. And here’s the problem: When the stock rose, there were many speculators who bought the stock only because they are interested in the increase, even though they did not know what’s exactly happening at the company. In addition, at the price of Rp400 per share, PER and PBV of the stock were still very high. There were a lot of people who thought that the valuation of TRAM is already low at the price, simply because it has dropped a lot (from 1,800 to 400, it means down more than 75%).

But well.. the victims are already fell, and now it seems like TRAM only need a little time  to reach its death level of Rp50 per share. The question is, okay,  TRAM might still expensive at 400. But at the current price of 55, it is now cheap, is not it? Even its PBV is only 0.5 times. In addition, as already discussed above, if later the company ultimately receives the insurance claim, then its net equity will be increased and its stock valuation will become much lower.

So in conclusion, can I buy it more? Well, of course it is not that simple. If you read again the discussion above, the problems of TRAM are not just about the fire of vessel Lentera Bangsa, or about the detention of the vessel Jelita Bangsa by the authorities, but because of there are too many unanswered questions, such as: 1. Why the management of TRAM sent a claim to the insurers almost three years after the fire incident? 2. Why the management of TRAM looked like they’re ignoring the problem of debt to IFC and Bank of Tokyo, until IFC had to file a warning letter? 3. When the insurance claim will be paid? 4. How does the actual details of the oil smuggling case involving the vessel Jelita Bangsa? When the ship would be released and start operating again? 5. Before the cases of Jelita Bangsa and the warning letter from IFC, how could the stock, against all odds, continue to moving up, and with a very huge volume of daily transactions? And 6. Based on registration data of security holders, at the end of April 2015, PT Trada Resources Indonesia and PT Trada International only holds a total of 36% of the shares of TRAM, or less than 50% plus 1 share, while the rest is held by the public. So who are the controlling shareholders of TRAM???

But even if we ignore the questions, then with a poor track record of financial performance, low profitabilities, huge amount of debts (and also problematic), and there is no certainty about the future of the company, then TRAM is a ridiculous option for serious investment. I mean, why would you buy shares of a shipping company which have recently lost the majority of its income sources, because the customers are certainly do not want to get involved with.. well .. whatever the cases attributed to the company?

So once again, we are not interested in this TRAM. But if you've already hold the stock, then there are two options: 1. Get out while you can, or 2. Just wait until the company released two positive news, ie that the company finally received payment of insurance claims, and the vessel Jelita Bangsa returned operates. When that happened, TRAM will have a very good reason to get up again.

However, I frankly do not know when it will happen, it might be very long from now, or even not happening at all. So perhaps the first option remains the best option. Nevertheless, the choice is yours.

Any inquiries about investment in Indonesia Stock Market? Please send an email to teguh@averepartners.com.