Indika Energy

Just a few days past in May, but the game difficulty has already switched from ‘easy’ to ‘hard’. Yup, currently there are many stocks, especially in the second liner group, which dropped significantly despite the Jakarta Composite Index (JCI) are not moving anywhere. But some stocks, let’s say Indika Energy (INDY), it goes up, and in this case the hike can be explained fundamentally, and that’s why we will discuss INDY here. Okay, here we go.

INDY is a holding company with assets in the fields of oil, coal and coal supporting infrastructure, and power plants. The company's largest asset is 46% stake in Kideco Jaya Agung, the third largest coal mining company (after Kaltim Prima Coal and Adaro) in Indonesia. INDY is also a controlling shareholder in Mitra Energi Agung, Multi Tambangjaya Utama, Tripatra Engineering, Tripatra Constructors, and Petrosea (PTRO), and holds a 35% stake in Santan Batubara. In the mining and energy infrastructure sectors, INDY is a controlling shareholder in Mitrabahtera Segara Sejati (MBSS, shipping company), Kuala Pelabuhan Indonesia (port company), and Petrosea Offshore (offshore logistics company), and holds a 20% stake in Cirebon Electric Power (power plant companies), 46% stake in Sea Bridge Shipping (shipping company), and 45% stake in Cotrans Asia (coal transporting company).

If you notice, INDY has some similarities with Bumi Resources (BUMI). Note: Although it is a large company (a few years ago INDY's market cap once reached US$ 3 billion, and BUMI was even bigger), but both are part of a larger business group. BUMI is a subsidiary of the Bakrie Group, while INDY is part of the Indika Group owned by Sudwikatmono Family (cousin of the late President Suharto), and the two companies are holdings for the coal and energy assets of both groups. And just like BUMI, INDY acquires its assets using debts. As a result when the coal sector began to slump in 2012, INDY immediately suffered losses due to interests expense when the majority of other coal companies only experienced a decline in profits. And the stock was mercilessly freefall from about Rp5,000 (yes, once INDY was once priced that high) to stuck at about Rp100 per share, in 2015.

The only difference, compared to BUMI, INDY is managed with more conservative, and also not too ambitious in taking over assets. In the peak period of coal industry in 2011, INDY only has a debt of 2.5 times its equity, or far below BUMI that has 6 times its equity. If BUMI always tries to take over majority ownership in many companies, one was Newmont Nusa Tenggara (through Bumi Resources Minerals/BRMS) but failed, INDY never heard trying to take control of Kideco (they are quite satisfied with 46% stakes), as well as in some other assets, they only become a minority shareholder. This different way of works caused INDY, despite having hard times several years ago and suffered losses of up to 4 years in a row (2013 – 2016), but it never had trouble to pay its debt or was forced to sell its assets just like BUMI.

So when the coal industry reached its lowest point in mid-2015, indicated by the shutting down or discontinuation of operations of some small-scale coal companies, and there were several coal companies which acquired by other companies, in this case Berau Coal Energy (BRAU) acquired by Sinarmas Group (investing tips: If a sector/industry has been so bad that some companies have to cease operations or went bankrupt, and the bankrupt companies were acquired by larger and more established companies, it is usually the turning point of the industry), I immediately checked the valuation of coal stocks, including INDY, which at that time was about Rp100s (Rp130 to be precise), and its PBV is only 0.1 times.

(Note: In July 2015, I have hinted about opportunities in the coal sector, you can read the analysis in this article, and read the comment too).

However, at the time I only put INDY into the watchlist only, and have not really interested to buy the shares, because I was not sure with the large debt of the company (INDY’s debt, although it was still less than BUMI’s debt, but it’s still enormous). Even when the stock price began to move up until it finally consolidated at the level of Rp700 – 800s, I still took no action, especially because INDY, as I worried, still posted losses of US$ 67.6 million in full year 2016, although coal prices began to rise in that year.

Maybe you wonder, how can we see that INDY may not yet profiting despite coal prices start climbing? The answer is simple: Most of INDY's assets are engaged in coal mining services and mining infrastructures, not the coal mining itself. For mining services company whose job is to excavate coal/oil owned by other companies, the earnings will only be recognized after the work is done, not when the contract is received. So when the price of coal rises, INDY's subsidiaries will received a lot of contracts to excavate coal from other companies, but the revenue would only be booked later, maybe 1 – 2 years later.

And because of the huge debt, even if we assume that starting in 2017, INDY's revenue will increase, the net earnings are not necessarily going up/the company may still lose because of interest expenses. In short, contrast to other coal companies that can be predicted to be profit, it is very difficult for any investor/analyst to see if INDY will profit or not in 2017. And that's why when there are a lot of coal stocks prices that rose significantly since the beginning of last year, INDY stock price tends to be stable in the Rp700s level, although it does not go down too, because everyone including me still wait and see on how INDY's performance in the first quarter of 2017.

So when INDY finally released its financial statement in late April, and it turned out that its income increased while the net profit was also positively solid at US$ 22 million, so that's the signal that everyone is waiting for: INDY then quickly skyrocketed, and when this article was written it was already at the level of Rp1,125 from the previous Rp700, a week ago. At first glance, a rise of almost 60% in just a week certainly looks unnatural, but in fact INDY just catches up with other coal stocks. Because if we look once again at the increase in coal stocks including INDY in the last year, then INDY's current position is the same with the others: It has gained about two folds.

But of course the important question is, could INDY go up further? If we look at the fact that its PBV at the price of Rp1,125 is still 0.7 times, the answer is yes. But as usual, you have to look far ahead, at least until next year. Because within a few days to several weeks ahead, then of course INDY probably will cool down first, as the rise of 60% in just one week is certainly too fast.

So How is the Strategy?

If you are interested in INDY, then the strategy is: First, make this INDY for your mid to long term investment, that after you buy it you have to keep it for a year to come. If you are interested in INDY only because it flew high few days ago, and you also hope that it will go higher again in the next 2 – 3 days, you may go after other stocks.

Secondly, regardless of the amount of funds that you prepare, separates the fund to at least three parts (or four parts is also allowed). The first part can be directly used to buy the stock right now, at any price. The second part is saved for the next month. If the price movement of INDY is similar to other cheap stocks that jumped when the financial statements are good (and the prospect is good), then no matter how high the rise, in the end it will go down again for consolidation, but it will not go back to the level before he rose (Rp700s). The consolidation process, or I like to call it cooling down, usually occurs for several weeks to 1-2 months, depending on the Jakarta Composite Index (JCI) as well. If INDY then down to 900 - 1,000, and stay there say for 2 – 3 weeks, then you can buy INDY shares once again. The important thing is, you have to wait until the price get stable for some moments at certain price range.

By the way, in value investing, and possibly also in any other methods of stock investments, we cannot predict the stock price movement in short term, or even in long term. But the important thing is whether it goes up or down (in short term), we know what to do. This strategy is called if what, then what.

And the third or last part, you can use it at the end of June (or early August) later, when INDY will soon (or just) release its financial statements for First Half of 2017. With the release of INDY’s financial statements for the first quarter, there is now optimism that the FS in the second quarter will be the same, or even better, because on the other side the company has just restructured some of its debts (INDY just issued bonds worth US$ 265 million with lower interest, for refinancing its previous debts), some of its coal mine units started to operate/increase production volumes along with stable coal prices, and its mining service business units received more contracts. The stock market optimism because of the above points will keep INDY to at least not going back to the level of the Rp700s, but still, for the long term, the shares will need further sentiments in order to rise higher. And the best sentiment is the financial statements. If all goes well, INDY would rise to Rp2,000s at the end of 2017.

Thus, it looks like we just got another good opportunity here. But remember that even the brightest diamond will not immediately look shiny when we excavated it from the ground. It must be sharpened first, and it’s not that simple to sharpen a diamond. Stocks are the same: No matter how good the fundamentals, no matter how cheap the valuation, but if we are carelessly buying it without propert analysisi and strategy, in the end you will suffer loss. The easiest example is KMI Wire & Cable (KBLI) stock, which we have recommended on this blog in October 2016 when the stock price is still at Rp300s, and indeed it then climbed high up to a break of Rp800s, but there were many stock traders who bought KBLI at the price of Rp700-800s (it’s already too late!), so now they suffer losses.

Anyway, the lesson has been learned, so hopefully this time for INDY, we are luckier.

PT Indika Energy, Tbk (INDY)

First Quarter 2017 Performance Ratings: A

Stock Ratings at 1,125: A

Original article was posted (in Indonesian Language) in 5 May 2017, here’s the link. Any inquiries, contact the author (Teguh Hidayat) by email teguh.idx@gmail.com.