KMI Wire & Cable

It is late October, and it is the time for investors to reevaluate financial performances of the companies and to seek ‘the hidden pearl’ or stocks which have good fundamental but get poor valuations. Nah, in this article we discuss one of the ‘precious stocks’, which I have already discovered some moments ago, and luckily its fundamental performance is still great.

The stock is KMI Wire & Cable (KBLI). KBLI is a cable producer located in Cakung, Jakarta Timur, and one of the oldest, the biggest, and the most well-known in our country, and one of the main cable sellers for State-Owned Electricity Company (PLN).  I noticed KBLI for the first time in 2013, more exactly in April, where the story of ‘infrastructure development’ was booming (which was more or less as booming as tax amnesty some moments ago), it caused a tremendous price increase in infrastructure stocks, especially in construction. And because the story of infrastructure was related to the megaproject development of 10,000 MW power plants (its plan had been published since 2011), then some people started to speculate: would cable stocks go up? Meanwhile among the cable stocks on IDX, the stock which had the best fundamental (and the most liquid) was KBLI. But when I reviewed it, the cable industry, although it might have a good prospect at a glimpse because the 10,000 MW project, but its risk was also huge mainly because of the swinging price of copper ore which had to be imported from abroad, and the net income of KBLI was also vulnerable to Rupiah exchange rate.

Unfortunately in the second half of 2013, Rupiah fell to Rp11,000’s by the US dollar, and kept falling near to Rp15,000 in August 2015. It was alright, I forgot it later, its price kept sinking from 200 – 300 to almost under 100 in the mid year of 2015.

Luckily in the early of 2016, the economic condition slowly but surely recovered, Rupiah strengthened again till it stabilized at Rp12,500 – 13,000 per USD, and KBLI reported an increased profit. It was the reason I kept my eyes on KBLI again, I was ‘aware’ of KBLI when it had already risen to 270’s (it had climbed up 120 positions in the beginning of 2016), recently it rises higher to 320’s.

The question is, does its increase continue? Well, let us check KBLI from its internal side. First, KBLI reported an increased profits in 2015 although the Rupiah exchange rate was weak, its income increased sharply to Rp2.7 trillion (from Rp2.4 trillion in 2014) with the fastened power plant project of the SOEC (under the new Government/President who was inaugurated  in 2014, all infrastructure projects were accelerated, including the 10,000 MW owned by SOEC and others). Second, it’s not only sped up, but its capacity was increased to 35,000 MW, then nearly KBLI’s turnover will increase. And third, until now KBLI produces low voltage cables, medium voltage cables, telephone cables, with aluminum and copper wires which become the materials to make the cable.

KBLI had already planned to make new variant called high voltage cable since 2013, it was intended to supply the needs of the power plant of SOEC. For information, low voltage cable is used for power cables installed in the house or building, medium voltage cable is used for substation/power pole on the main road or housing, meanwhile high voltage cable is for bigger substation, which transfers electricity from the power distribution center to one particular area, for example a town (actually there is another cable called extra high voltage cable, it is usually used for extra high voltage transmission lines with its great size, but KBLI doesn’t make the extra high voltage cable).

Okay, then how did it realize the plan mentioned above? Here it is: the company started to buy machines for making the high voltage cable in 2015, if the progress does well then KBLI will be able to make the high voltage cable in 2016 - 2017, and it will nearly increase its income.

Then, if we discuss the outlook of KBLI then it offers the interesting long-term prospect, especially because its management is the traditional management which produces cable then sells it, and never takes loans. Because of its traditional way, KBLI grows moderately, in which its equity value rises from Rp720 billion to Rp1 trillion in 2015, then its growth rate is only 9.2% a year. But from 2016 onward, it strives for growing faster than its usual pace. Besides producing high voltage cable, KBLI also increases the volume of low voltage cable to 50% in 2016, as the demand for SOEC rises.

How about its latest performance? Here we go: KBLI reported net income Rp228 billion, its annualized ROE is 24.8%, or pretty big for a second liner company. KBLI’s equity has grown 19% in the first nine months of 2016, or faster than usual, although it has not produced the high voltage cable mentioned above (actually it has made it, but only for the underground installation). If we review its past track records which were stable, its profit decreased in 2013 and 2014 because of the weakening of Rupiah even though its income increased, so I am optimistic KBLI keeps its good performance till end of 2016, and its income goes up in the next year's, because it needs a huge amount of time to finish the 10,000 MW power plant development project, it is projected to end in 2019 (but I think its realization is going take longer time, as 10,000 MW is quite big).

Last, how about its stock? Well, even though it raises a lot, but at 328 its valuation is still low at PBV 1.1 times and PER 4.3 times, with its latest performance and its long-term prospect, it usually continues to increase (although its stock won’t climb up in one day or two, of course), because KBLI’s transaction volume is not liquid and its stock rarely attracts people. If the market has a lot of hype and positive sentiments about infrastructure development and others in the beginning of 2017 (the market usually has fewer positive sentiments at the end of the year), then the news about 35,000 MW mentioned above is going to be a hot topic, and KBLI will rally at that moment. We’ll see.

PT KMI Wire & Cable, Tbk (KBLI)

Rating of Performance on Q3 2016: AA

Rating of Stock Price on 328: AA

Disclosure: when this article is published, Avere holds KBLI at an average of 290. The position may change anytime without notice.

Original article was written (in Indonesian Language) in October 31, 2016. For inquiries, please contact the author by email teguh.idx@gmail.com