The Jakarta Composite Index (JCI) began its
journey in 2016 through a bumpy road. When this article was written, the index
is still dropped 1.5% in year to date. Although the decline is still much
better than the decline in China and United States, where the Shanghai Index and
the Dow Jones fell 18.0 and 8.2% respectively, but several stocks in the oil
and gas and mining sectors had fallen significantly, in line with the decline
in price of oil to as low as US$ 30 per barrel. One of the stocks, Elnusa (ELSA), recently closed at Rp200
per share, dropped almost 20% since the beginning of the year.
And not only in Indonesia, but the stocks pf of
global-scale oil and gas companies such as Royal Dutch Shell, Exxon Mobil, BP,
Chevron, Total SA, all of them also fell. But interestingly, not long ago
Berkshire Hathaway disclosed that they add their holdings in Phillips 66, an oil refinery company
headquartered in Texas, USA. We certainly familiar with the style of Opa Warren
who likes to buy shares of a company precisely when most people avoid it, and
in this case by buying shares of oil companies when oil prices continue to
slide down. But the question is, is this a signal that smart
money has begun to enter the game as the majority of investors have been
desperate with the oil
business? About the decline in the stock of Elnusa earlier, is this an
opportunity?
Elnusa at a Glance
ELSA is a subsidiary of Indonesian state-owned oil
company, Pertamina, which is engaged in oil services. Yep, ELSA does not
produce oil, but provide land seismic, drilling, fabrication etc. for oil and
gas companies who operate in Indonesia. Some company’s customers are Pertamina
Hulu Energi, Pertamina EP, Medco, Pertagas, Total Indonesie, and Chevron
Pacific Indonesia. Especially for land seismic services, ELSA is one of the
pioneers who has been experienced since 1974, and currently hold the status as
market leader in the country.
Since I entered the Indonesian stock market for
the first time in 2009, the oil and gas sector in the IDX has never had good fundamentals,
even when the oil price was above US$ 100 per barrel, thus I never found
investment opportunities in this sector (but actually it wasn’t without
explanation, you can read it here). And by the way, Perusahaan Gas Negara (PGN) can not be classified as an oil and gas company,
or oil and gas services company, because it is only a distributor of gas.
However, compared to some other listed oil companies
such as Ratu Prabu Energi (ARTI), Benakat Integra (Bipi), Energi Mega Persada
(ENRG), or Medco (MEDC), ELSA has relatively good fundamentals, though still
below the standard of ‘good’ of my version. But if you are interested to follow
the step of Buffett who buy oil stocks at low prices, then the option that make
most sense is, of course, ELSA. And with PBV of 0.6 times at the price of Rp200
per share, if in next time oil prices rebound, the stock may generate a quick
profit.
However, for a serious investment in the long
term, ELSA is not a best choice. Since 2010 until now, the company's revenue
was stagnant at about US$ 400 millions per annum, and the increase in company’s
net profit was only driven by the increasing efficiency of, but even until
today the profit margin is still below 10%, aka fairly low. Then, as the oil
prices declined since the beginning of 2015, ELSA’ revenues also got oppressed
that until the third quarter, it only about US$ 210 million, so it is possible
that for the whole year of 2015, the revenue will be less than US$ 400 million,
and indeed the management only estimate that ELSA’ net earnings will only be US$
30 million for 2015, down significantly compared to 2014 which was US$ 38 million.
In the public expose held by the company when the oil price was US$ 45 per
barrel, the management has said that the company's financial performance, while
down, but not as deep as the decline in oil and gas industry in general, because
in contrast to the other oil and gas companies in the country, ELSA has a relatively
small debt.
Decreasing Performance
But the key word is that ‘the company’s
performance is going down in line with the decline in oil prices’. And since
the oil price is now at US$ 30 per barrel, then well.. Good bye! About the
stock, back in 2011, when the price of oil was at US$ 120 per barrel, ELSA
instead suffered losses US$ 4 million, so that the stock tumbled from 350’s to
160’s. But since 2012 until 2014, the company succeed in making earnings, and
it continued to increase up to US$ 38 million at the end of 2014, so that the
stock rose until touched Rp700 per share, aka scored gains of more than
three-fold in less than three years.
Entering 2015, the efficiency of the performance
of ELSA, which had been a problem in the past, might been better, but the
problem still lies in the inability of the company to increase its revenue, so
the profit is still dropped, and also the stock.
So, ELSA could climb back up if one of these two
occurs: 1. Oil prices rebound, and 2. The company's performance shows
improvement. For the first point, it can happen anytime and when that happens,
then the stock will rise very sharply, may be up to several tens of percent in
just one or two days, but only for a moment before then dropped again (because
eventually, people will see the financial statements). For the second point, it
will only occur in the end of April when the company releases its financial
statements of the First Quarter 2016, and of course the performance would
improve only if the oil price has rebounded before.
In conclusion, I do not know with others, but I will
not buy ELSA, not now. When Opa Buffett bought Phillips 66, perhaps it is because
the company, until the third quarter of 2015 still posted a profit of US$ 3.6
billion, or relatively equal to the same period in 2014 although the oil price
was under pressure in that period, while the performance of other oil companies
are already on falling even since 2013. While ELSA? Well, he’s not that good,
at least for the moment, so it's better to wait unless you’d like to speculate
on the price of oil which could bounce at any time. But, well, I certainly do
not advise you to ‘invest’ in that way.
PT. Elnusa Tbk
Rating of Performance until Third Quarter of 2015:
BBB
Rating of share price at 200: A
Any inquiries about investment in Indonesia Stock Market, please send an email to teguh@averepartners.com
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