Time to Buy Coal Stocks?

When this article was written, the Jakarta Composite Index (JCI) is in a position of 4,717, dropped almost 10% since the beginning of this year. In a condition like this, of course almost all shares on the Indonesia Stock Exchange (IDX) has been dropped. But interestingly, based on IDX stats, the index of mining sector has plunged 27.2% during 2015, the worst compared to any other sectors, while in fact the stocks in this sector have gone down a lot in previous years. Some mining stocks, or in this case, coal stocks, even fell more than 90%, if calculated from their peak position in 2011.

On the other hand, if you learn the financial performance of coal companies in the first quarter of 2015, then no wonder if the stocks in this sector continue to fall, because the performance were still bad. Moreover, because the price of coal continues to be down until today, then it was hard for anyone to be optimistic about the future of the sector.

However, will the situation be like this forever? I mean, okay, the price of coal is still going down. But will it continue to fall until, let say, zero US Dollars per tonne, and never rise back? If power plants around the world are no longer using coal, then the answer is probably yes, but that’s not the fact. Based on data from www.worldcoal.com, currently about 41% of world’s power plants are still using coal as fuel. When the Government of Indonesia officially started the construction of 35,000 megawatt power plants, last May, most of the plants will also use coal as fuel. According to Minister of Energy and Mineral Resources, Sudirman Said, when later the construction is completed, the Indonesian coal consumption will rise from the currently 90 million tonnes per year, to about 200 million tonnes per year.

But if the world is still in need of coal, then why the price continued to fall? Well, of course there are many causes, but one of the most influential is because of oversupply. In 2012, Indonesia had become the fifth largest coal producer in the world (behind China, USA, India, and Australia), but the rate of coal consumption was very low, so most of the coal is exported to China, India, and Japan, especially China which is the largest coal consumer in the world (the second largest coal consumer is US of A, but the country is too far from Indonesia).

Thus, when China's economic growth continued to slowing down in the last few years, the growth in the country’s coal consumption is also no longer as fast as before. Whereas on the other hand, coal companies around the world, including Indonesia, continued to increase their production volume (during 2014 Indonesia produced 458 million tons of coal, or down compared to 2013 which was 474 million tons, but still much higher than in 2011 of 353 million tons). When the supply of coal is not in sync with the demand, then of course the prices would drop. If someday the supply match the demand, either because the supply goes down or the demand goes up, that’s when the coal prices will recover.

And I’m not sure about supply, but demand of coal for power plants will eventually rise over the long term, because electricity is needed continuously by whole population, while the number of population itself is keep increasing. So it may be just a matter of time before coal prices will rise again, though, of course, we will never know when it will happen.

Time for Buy?

In value investing, as I said many times before, we only buy stocks that: 1. The company posted a good performance in its recent financial statements, and 2. The valuation is still low. If you find two stocks that meet these two criteria, but only want to buy one of them, you may add the third criteria: The company has a bright outlook/ future, whether in the short term (one year or less), or long. This third criteria is indeed a little bit speculative because we certainly can not see the future. But based on experience, a company that has a good track record of financial performance in the past, and is managed by a honest management team, it usually will make a good performance in the future.

Unfortunately, if you look at the last performance of coal companies in the first quarter 2015, you wouldn’t fina a company with a good financial performance, where even such A-class company like Bukit Asam (PTBA) posted a 37% decline in net income. Some smaller companies like Garda Tujuh Buana (GTBO), had to partly stop operating as the management couldn’t longer bear the losses resulting from the declining coal prices.

GTBO.. What a pity

So in our view, today is still not the time to buy coal stocks, because no one among those stocks that met the criteria of Number 1 above.

On the other hand, it is undeniable that coal stocks are now so cheap, where there are several coal companies that: 1. Its assets consist of large cash or any other current assets, 2. Only had little debts, or no debt at all, and 3. Have a mountain of coal reserves that are ready to be 'harvested' at any time when the coal prices rise again, but their PBV were already less than 1 times. Their current PE ratios are still high, that’s right, but that’s because their net incomes were at its lowest level (or even loss). Sooner or later, when coal prices back to its normal level, when coal companies starting to score high ROE’s, you’ll be amazed when you find out how cheap the stocks are.

But when will it happen? Well of course I don’t know! But in this case I remember about stocks in property sector in 2010. Back then, the property companies also had poor performance, because of impact of the global crisis in 2008, which caused by subprime mortgage crisis in the USA. So between 2008 to 2010, the condition of the property sector was much like the condition of the coal sector at the moment. As a result, all property stocks fell down. In 2010, there weren’t property stocks that are traded at the price of above Rp1,000 per share. Even some today-big-caps like Lippo Karawaci (LPKR) or Bumi Serpong Damai (BSDE) were then regarded as second liner stocks.

But only a year later, ie in 2011, property companies began to score good financial performance, as a result of domestic economic growth which had reached a record of 6.9% per year. And of course, property stocks began to rise.. and continue to rise.. until they reache their peak in 2013 ago. If someone bought property stocks in 2010, he would make profit several hundred percent.. in just three years. One of the most successful property stocks, Alam Sutera Realty (ASRI) even climbed from 100’s in 2010, until reached 1,000’s in 2013, an increase of tenfold!

But ASRI did not (yet) posted a good financial performance, so the decision to buy it at the time might seem as a stupid decision.

So yeah, maybe that's why Sinarmas Group decided to acquire Berau Coal Energy (BRAU), and who knows if the other major groups are also quietly began to accumulate coal stocks. If they are lucky, the profit can be so huge after three or five years. What do you think?

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