AKR Corporindo AKRA IJ -Buy- Short-term headwinds before 2025F tailwinds

Other Industies JT GH 479 15th Oct, 2024

We cut 2024F/2025F earnings by 7.2%/3.4%; slightly cut TP to IDR1,900

We trim our 2024F/2025F earnings estimates for AKRA by 7.2%/3.4% due to unfavorable general market conditions such as the drop in PMI, and the sluggish coal production due to weather-related events. Also, coal production as of 3Q24 grew only by +0.6% y-y while prices declined by -9%. We believe this could put some short-term pressure on AKRA’s trading business. However, 2025F will likely present tailwinds for the company, namely from the: 1) increase in utilities revenues as more tenants start operating plants, thus reduce earnings volatility in the future; 2) additional trading infrastructure (which could thus increase efficiency and volume); and 3) benefits from the government’s target to reduce subsidy.

Unfavorable general market and coal production conditions

Indonesia's PMI fell below 50 for three consecutive months in 3Q24, signaling short-term weakness, impacting AKRA’s main markets (transport, logistics, and general markets), which constitutes around 40-50% of its total volume, and potentially affecting margins and volume. The coal market has been constrained by heavy rains, which affected production, according to our industry survey, with production in 3Q24 growing just +0.6% y-y (vs a FY24 target of +19% y-y vs 775mt in 2023 to 920mt).

Yet, 2025F may record tailwinds from JIIPE, infrastructure improvement and regulation to reduce subsidy

We expect utilities revenue at JIIPE (Java Integrated Industrial and Port Estate, unlisted) to grow from IDR188bn in 2024F to IDR2.1tn in 2025F, with gross profit reaching IDR267bn (around 6-7% of consolidated gross profit). One of AKRA’s investments is in the tanks business – where AKRA aims to increase capacity further by +10% by 2025F, which we deem positive as this could increase volume and increase efficiency. The government’s target to reduce subsidy may also present an opportunity for AKRA to supply to the previously subsidized market.

Still in a sweet spot for long-term mining and industrial estate; maintain Buy

We believe AKRA is still in well positioned to benefit from the growth of downstream and the industrialization of Indonesia through its robust infrastructure and solid industrial estate business model. AKRA has also been consistently paying dividend, and we expect a payout of 80% in both 2024F/2025F and yield of 7.1%/7.7%. Our new TP of IDR1,900 continues to be based on SOTP methodology (see Fig. 7). The stock currently trades at 10.6x FY25F P/E.

Year-end 31 DecFY23FY24FFY25FFY26F
Currency (IDR)ActualOldNewOldNewOldNew
Revenue (bn)42,08743,34140,96748,08744,770047,701
Reported net profit (bn)2,8002,8872,6783,0072,90503,147
Normalised net profit (bn)2,8002,8872,6783,0072,90503,147
FD normalised EPS139.50143.83133.40149.82144.72159.42
FD norm. EPS growth (%)15.18.7-4.44.28.510.2
FD normalised P/E (x)11.011.510.69.6
EV/EBITDA (x)8.28.47.26.3
Price/book (x)2.72.62.42.4
Dividend yield (%)8.17.17.78.2
ROE (%)25.222.223.220.824.024.8
Net debt/equity (%)net cashnet cashnet cashnet cashnet cashnet cash
Source: Company data, Verdhana estimates
Income statement (IDRbn)
Year-end 31 Dec
FY22
FY23
FY24F
FY25F
FY26F
Revenue
47,540
42,087
40,967
44,770
47,701
Cost of goods sold
-43,288
-37,613
-36,971
-40,311
-42,911
Gross profit
4,252
4,473
3,995
4,459
4,790
SG&A
-1,166
-823
-901
-985
-1,049
Employee share expense
Operating profit
3,087
3,651
3,094
3,474
3,741
EBITDA
3,479
3,841
3,564
3,975
4,275
Depreciation
-393
-190
-470
-501
-535
Amortisation
EBIT
3,087
3,651
3,094
3,474
3,741
Net interest expense
-8
128
219
123
158
Associates & JCEs
Other income
7
-91
35
35
35
Earnings before tax
3,086
3,687
3,347
3,631
3,933
Income tax
-545
-589
-502
-545
-590
Net profit after tax
2,541
3,098
2,845
3,086
3,343
Minority interests
-76
-298
-167
-182
-197
Other items
Preferred dividends
Normalised NPAT
2,465
2,800
2,678
2,905
3,147
Extraordinary items
Reported NPAT
2,465
2,800
2,678
2,905
3,147
Dividends
-829
-2,467
-2,142
-2,324
-2,517
Transfer to reserves
1,636
333
536
581
629
Valuations and ratios
Reported P/E (x)
12.5
10.8
11.3
10.4
9.6
Normalised P/E (x)
12.5
10.8
11.3
10.4
9.6
FD normalised P/E (x)
12.7
11.0
11.5
10.6
9.6
Dividend yield (%)
2.7
8.1
7.1
7.7
8.2
Price/cashflow (x)
11.9
8.8
7.5
7.4
6.7
Price/book (x)
2.8
2.7
2.6
2.4
2.4
EV/EBITDA (x)
9.1
8.2
8.4
7.2
6.3
EV/EBIT (x)
10.2
8.7
9.7
8.2
7.2
Gross margin (%)
8.9
10.6
9.8
10.0
10.0
EBITDA margin (%)
7.3
9.1
8.7
8.9
9.0
EBIT margin (%)
6.5
8.7
7.6
7.8
7.8
Net margin (%)
5.2
6.7
6.5
6.5
6.6
Effective tax rate (%)
17.7
16.0
15.0
15.0
15.0
Dividend payout (%)
33.6
88.1
80.0
80.0
80.0
ROE (%)
24.3
25.2
23.2
24.0
24.8
ROA (pretax %)
14.1
15.7
13.0
14.2
14.5
Growth (%)
Revenue
84.9
-11.5
-2.7
9.3
6.5
EBITDA
97.9
10.4
-7.2
11.5
7.6
Normalised EPS
113.5
15.1
-4.4
8.5
8.3
Normalised FDEPS
110.7
15.1
-4.4
8.5
10.2
Source: Company data, Verdhana estimates
Cashflow statement (IDRbn)
Year-end 31 Dec
FY22
FY23
FY24F
FY25F
FY26F
EBITDA
3,479
3,841
3,564
3,975
4,275
Change in working capital
-158
633
986
753
857
Other operating cashflow
-692
-971
-417
-569
-594
Cashflow from operations
2,629
3,502
4,133
4,158
4,538
Capital expenditure
-411
-660
-331
-435
-472
Free cashflow
2,218
2,842
3,802
3,723
4,066
Reduction in investments
-16
-29
0
0
0
Net acquisitions
Dec in other LT assets
Inc in other LT liabilities
Adjustments
409
33
0
0
0
CF after investing acts
2,611
2,846
3,802
3,723
4,066
Cash dividends
-829
-2,467
-2,142
-2,324
-2,517
Equity issue
Debt issue
-9
1,584
0
0
0
Convertible debt issue
Others
-36
235
-257
214
228
CF from financial acts
-873
-648
-2,399
-2,110
-2,290
Net cashflow
1,737
2,198
1,403
1,613
1,776
Beginning cash
2,600
4,338
6,536
7,939
9,552
Ending cash
4,338
6,536
7,939
9,552
11,329
Ending net debt
-1,374
-1,987
-3,390
-5,004
-6,780
Balance sheet (IDRbn)
As at 31 Dec
FY22
FY23
FY24F
FY25F
FY26F
Cash & equivalents
4,338
6,536
7,939
9,552
11,329
Marketable securities
Accounts receivable
6,020
6,460
6,698
7,767
8,753
Inventories
5,221
4,754
4,673
5,095
5,424
Other current assets
262
371
371
371
371
Total current assets
15,841
18,121
19,680
22,785
25,876
LT investments
417
446
446
446
446
Fixed assets
4,997
5,466
5,329
5,264
5,202
Goodwill
Other intangible assets
Other LT assets
5,932
6,221
6,221
6,221
6,221
Total assets
27,188
30,255
31,676
34,716
37,745
Short-term debt
556
1,094
1,094
1,094
1,094
Accounts payable
9,662
10,319
11,461
13,706
15,877
Other current liabilities
1,062
1,120
1,120
1,120
1,120
Total current liabilities
11,280
12,533
13,676
15,920
18,092
Long-term debt
2,408
3,454
3,454
3,454
3,454
Convertible debt
Other LT liabilities
344
224
224
224
224
Total liabilities
14,033
16,212
17,354
19,599
21,770
Minority interest
2,186
2,780
2,524
2,738
2,966
Preferred stock
Common stock
1,689
1,689
1,689
1,689
1,689
Retained earnings
9,094
9,397
9,932
10,513
11,142
Proposed dividends
Other equity and reserves
186
177
177
177
177
Total shareholders' equity
10,969
11,263
11,798
12,379
13,009
Total equity & liabilities
27,188
30,255
31,676
34,716
37,744
Liquidity (x)
Current ratio
1.40
1.45
1.44
1.43
1.43
Interest cover
379.3
Leverage
Net debt/EBITDA (x)
net cash
net cash
net cash
net cash
net cash
Net debt/equity (%)
net cash
net cash
net cash
net cash
net cash
Per share
Reported EPS (IDR)
123.23
141.87
135.67
147.18
159.42
Norm EPS (IDR)
123.23
141.87
135.67
147.18
159.42
FD norm EPS (IDR)
121.20
139.50
133.40
144.72
159.42
BVPS (IDR)
555.75
570.63
597.76
627.20
648.05
DPS (IDR)
42.00
125.00
108.54
117.74
125.40
Activity (days)
Days receivable
40.4
54.1
58.8
59.0
63.2
Days inventory
41.0
48.4
46.7
44.2
44.7
Days payable
74.6
96.9
107.8
113.9
125.8
Cash cycle
6.8
5.6
-2.4
-10.7
-17.9
Source: Company data, Verdhana estimates

Company profileAKRA was established in 1960, in 1977 the firm is formally incorporate under the name “Aneka Kimia Raya”. AKRA engages in 4 business segments: 1) Trading and distribution of petroleum and basic chemicals 2) Industrial estate -- in Java Integrated Industrial and Ports Estate (JIIPE) located in Gresik, West Java, Indonesia. 3) Logistic services. 4) Manufacturing segment
Valuation MethodologyAKRA's TP of IDR1,900 is derived from SOTP methodology. For it's trading and distribution business, we value it using target P/E of 10x. For its manufacturing & logistics and utilities business are valued using DCF with a WACC of 10% and terminal growth of 2.5%. It's industrial estate business is valued using discount to NAV of 30%. The benchmark for the stock is JCI.
Risks that may impede the achievement of the target priceDownside risks to our call include: 1) lower-than-expected volume for its trading & distribution business; 2) unfavorable dynamics, with abundant oil supply and lower commodity prices; 3) lower-than-expected ASP for its chemical business; and 4) delayed customer acquisition strategy for JIIPE.

ESGThe implementation of ESG aspects moved towards the initiation strategy for the development of a cleaner energy business (JV Gas Distribution). AKRA’s shares in 2021 were included in various well-known ESG Indexes: 1) ESG Leader Index, 2) Sri Kehati Index, 3) ESG Starlist Company, 4) ESG Quality 45 IDX KEHATI. AKRA's best ESG practices can be seen in its health & safety (12.565.738 hours without incident in 2021), opportunity equality (43% director level, 21% management level), and 0 environment complaint in 2021.


Fig. 1: AKRA’s petroleum trading customer breakdown by sector

Source: Company data,Verdhana Verdhana research

 

Fig. 2: Indonesia's weakness in the general market — drop in PMI in all three months during 3Q to below 50

Source: CEIC, Verdhana research

 

Fig. 3: Coal ICI-4 prices – down yoy %

Source: Company data, Verdhana research

 

Fig. 4: Indonesia coal production – limited signs of strong growth due to severe weather condition, in our view

Source: MODI, Verdhanaresearch

 

Fig. 5: AKRA’s trading & distribution gross profit trend

Source: Company data, Verdhana research

 

Fig. 6: Consistent dividend payment to reward shareholders

Source: Company data, Verdhana research

 

Fig. 7: AKRA valuation methodology

AKRA's  SOTP valuationMethodEVOwnershipOwnership adj-EV
Trading & distribution (T&D)Target P/E 10x        20,859100%                           20,859
Manufacturing & logisticsDCF (WACC 10%, TG 1.0%)              815100%                                 815
Industrial estateDisc to NAV - 30%        12,74260%                             7,645
UtilitiesDCF (WACC 10%, TG 2.5%)          6,13060%                             3,678
                            32,997
 Net debt (cash) - ex T&D (IDR bn)                           (4,489)
 Equity value (IDR bn)                           37,486
 #shares                           20,073
   TP (IDR/share)                             1,900
Source: Company data, Verdhana estimates

 


INVESTMENT RATINGS
A rating of ‘Buy’, indicates that the analyst expects the stock to outperform the Benchmark over the next 12 months. A rating of ‘Neutral’, indicates that the analyst expects the stock to perform in line with the Benchmark over the next 12 months. A rating of ‘Reduce’, indicates that the analyst expects the stock to underperform the Benchmark over the next 12 months. A rating of ‘Suspended’, indicates that the rating, target price, and estimates have been suspended temporarily to comply with applicable regulations and/or firm policies. Securities and/or companies that are labelled as ‘Not Rated’ or ‘No Rating’ are not in regular research coverage. Benchmark is Indonesia Composite Index (‘IDX Composite’). A ‘Target Price’, if discussed, indicates the analyst’s forecast for the share price with a 12-month time horizon, reflecting in part of the analyst’s estimates for the company’s earnings, and may be impeded by general market and macroeconomic trends, and by other risks related to the company or the market in general. 

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Rating
Remains
Buy
Target price
Reduced from IDR 2,100
IDR 1,900
Closing price
14 October 2024
IDR 1,535
Implied upside+23.8%
Market Cap (USD mn)1,980.9
ADT (USD mn)2.9


Source: LSEG, Verdhana

M cap (USDmn)
1,980.9
Free float (%)
38.7
3-mth ADT (USDmn)
2.9
(%)
1M
3M
12M
Absolute (IDR)
4.4
2.3
5.1
Absolute (USD)
3.3
6.1
6.0
Rel to Jakarta Stock Exchange Composite Index
7.7
-0.8
-4.0

Jupriadi Tan (jupriadi.tan@verdhana.id)

Gerald Hugo (gerald.hugo@verdhana.id)