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Harum Energy HRUM IJ -Buy- Tsingshan A game-changing partner for HRUM

Harum Energy HRUM IJ -Buy- Tsingshan A game-changing partner for HRUM

Coal MW EP 1.3K 8th Oct, 2024

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Tsingshan: A game-changing partner for HRUM

Maintain Buy with a lower TP of IDR1,870

Tsingshan to acquire 49% of HRUM’s nickel business

HRUM has announced a strategic partnership with Eternal Tsingshan (ET, unlisted) to release up to 49% of its nickel subsidiary shares through the issuance of mandatory convertible debt to ET. In our view, this move aims to: (1) maintain the majority consolidation over HRUM's nickel operations in its financials; and (2) improve its capital structure by reducing debt by USD412mn. Despite initial concerns about asset dilution, we believe this has been priced in. On the contrary, we expect that partnering with Tsingshan, a major nickel player, will accelerate HRUM’s transformation and unlock future asset opportunities.

We expect nickel to contribute 49% to earnings in FY25F and 85% in FY26F

We have revised down our revenue/earnings forecasts by 14.2%/52.7% for FY24F as we have revised down nickel sales volume while incorporating minority changes post the Tsingshan transaction. We have revised our EBITDA estimates lower to USD287/311mn for FY24F/25F (from USD356/340mn earlier), to reflect our revised cash margin forecasts for both nickel and coal for FY24F (-17.9% and -22.6% for nickel and coal vs our previous estimates, respectively). Despite these revisions, we expect nickel revenue contribution to increase from 58% this year to >80% over the next three years, while its earnings will contribute 49% in FY25F and 85% in FY26F, mainly from BSE HPAL's contribution (Fig. 4).

HRUM’s nickel production growth is one of the highest among peers; we reiterate our Buy rating

HRUM remains one of the best nickel production growth stories among peers, supported by Tsingshan as a strong partner (Fig. 2). Key catalysts for 2024 include: (1) increased output from WMI RKEF post-commissioning in 1Q24; (2) POS mine to be operational in 4Q24 aiming to self-supply its nickel ore, ultimately reducing smelter cash costs; and (3) BSE HPAL operations expected in 4Q25. On the coal side, HRUM maintains a production target of 6MT for FY24 with a targeted strip ratio of 11x.

We have a Buy rating on HRUM with a lower TP of IDR1,870 (IDR1,920 earlier), based on FY25F SOTP valuation using DCF for the coal and nickel segments. As nickel earnings outpace coal (nickel comprised 79% of our SOTP value), we expect HRUM’s valuation to rerate align with nickel peers. HRUM is currently trading at ~9x FY25F P/E, compared to mid-teens for nickel peers. Downside risks include commodity price volatility, delays in production, and regulatory changes.

Year-end 31 DecFY23FY24FFY25FFY26F
Currency (USD)ActualOldNewOldNewOldNew
Revenue (mn)9261,5981,3711,6241,60102,268
Reported net profit (mn)151197931901320183
Normalised net profit (mn)151197931901320183
FD normalised EPS1.12c1.46c0.69c1.41c0.98c1.35c
FD norm. EPS growth (%)-49.96.5-38.3-3.541.538.7
FD normalised P/E (x)8.1–13.1–9.3–6.7
EV/EBITDA (x)4.3–6.9–6.4–3.2
Price/book (x)1.4–1.3–1.1–1.0
Dividend yield (%)0.4–––0.0–0.0
ROE (%)18.619.510.016.312.916.1
Net debt/equity (%)5.819.62.017.52.1net cash
Source: Company data, Verdhana estimates

Key data on Harum Energy

Income statement (USDmn)
Year-end 31 Dec
FY22
FY23
FY24F
FY25F
FY26F
Revenue
904
926
1,371
1,601
2,268
Cost of goods sold
-363
-543
-1,059
-1,246
-1,572
Gross profit
541
382
311
355
697
SG&A
-101
-98
-86
-112
-161
Employee share expense
Operating profit
440
284
225
243
536
EBITDA
472
340
287
311
641
Depreciation
-32
-56
-62
-68
-106
Amortisation
EBIT
440
284
225
243
536
Net interest expense
-1
13
-16
-20
-102
Associates & JCEs
39
25
3
8
16
Other income
-1
-59
-36
0
0
Earnings before tax
478
263
177
231
450
Income tax
-98
-67
-33
-27
-14
Net profit after tax
380
196
143
204
435
Minority interests
-78
-45
-50
-72
-253
Other items
Preferred dividends
Normalised NPAT
302
151
93
132
183
Extraordinary items
Reported NPAT
302
151
93
132
183
Dividends
0
-5
0
0
0
Transfer to reserves
302
146
93
132
183
Valuations and ratios
Reported P/E (x)
4.1
8.1
13.1
9.3
6.7
Normalised P/E (x)
4.1
8.1
13.1
9.3
6.7
FD normalised P/E (x)
4.1
8.1
13.1
9.3
6.7
Dividend yield (%)
0.0
0.4
–
0.0
0.0
Price/cashflow (x)
2.8
10.6
–
6.8
5.5
Price/book (x)
1.7
1.4
1.3
1.1
1.0
EV/EBITDA (x)
2.4
4.3
6.9
6.4
3.2
EV/EBIT (x)
2.5
5.1
8.7
8.1
3.8
Gross margin (%)
59.9
41.3
22.7
22.2
30.7
EBITDA margin (%)
52.2
36.7
21.0
19.4
28.3
EBIT margin (%)
48.7
30.7
16.4
15.2
23.6
Net margin (%)
33.4
16.3
6.8
8.2
8.1
Effective tax rate (%)
20.5
25.6
18.9
11.8
3.1
Dividend payout (%)
0.1
3.1
0.0
0.0
0.0
ROE (%)
50.1
18.6
10.0
12.9
16.1
ROA (pretax %)
58.7
25.9
12.7
11.3
22.9
Growth (%)
Revenue
169.0
2.3
48.1
16.8
41.7
EBITDA
214.5
-28.0
-15.5
8.1
106.4
Normalised EPS
306.9
-49.9
-38.3
41.5
38.7
Normalised FDEPS
306.9
-49.9
-38.3
41.5
38.7
Source: Company data, Verdhana estimates
Cashflow statement (USDmn)
Year-end 31 Dec
FY22
FY23
FY24F
FY25F
FY26F
EBITDA
472
340
287
311
641
Change in working capital
95
-95
39
-20
-64
Other operating cashflow
-121
-129
-381
-111
-353
Cashflow from operations
446
116
-55
180
224
Capital expenditure
-32
300
-626
-120
-121
Free cashflow
414
416
-681
59
103
Reduction in investments
-115
146
72
-8
-16
Net acquisitions
-330
-215
Dec in other LT assets
-18
-490
333
-59
-72
Inc in other LT liabilities
Adjustments
0
-123
-1
-1
-2
CF after investing acts
281
-381
-493
-9
14
Cash dividends
4
0
-5
0
0
Equity issue
0
0
0
0
0
Debt issue
-181
137
90
-37
-53
Convertible debt issue
Others
116
31
462
43
152
CF from financial acts
-60
168
547
6
99
Net cashflow
221
-213
55
-3
112
Beginning cash
149
371
157
212
209
Ending cash
371
157
212
209
321
Ending net debt
-371
52
19
22
-90
Balance sheet (USDmn)
As at 31 Dec
FY22
FY23
FY24F
FY25F
FY26F
Cash & equivalents
371
157
212
209
321
Marketable securities
Accounts receivable
92
130
150
175
249
Inventories
43
78
152
178
225
Other current assets
14
67
67
67
67
Total current assets
519
432
581
630
862
LT investments
389
244
172
180
196
Fixed assets
52
169
959
1,022
1,051
Goodwill
4
4
184
184
184
Other intangible assets
273
253
243
233
222
Other LT assets
41
531
198
257
329
Total assets
1,279
1,633
2,338
2,507
2,845
Short-term debt
72
72
72
72
72
Accounts payable
21
92
179
211
266
Other current liabilities
132
93
138
139
139
Total current liabilities
226
257
390
422
477
Long-term debt
0
137
159
159
159
Convertible debt
Other LT liabilities
61
65
64
64
64
Total liabilities
287
458
613
645
700
Minority interest
258
289
751
794
946
Preferred stock
Common stock
199
199
199
199
199
Retained earnings
543
694
783
877
1,007
Proposed dividends
Other equity and reserves
-7
-7
-7
-7
-7
Total shareholders' equity
734
886
974
1,069
1,199
Total equity & liabilities
1,279
1,633
2,338
2,507
2,845
Liquidity (x)
Current ratio
2.30
1.68
1.49
1.49
1.81
Interest cover
491.1
–
14.3
12.2
5.3
Leverage
Net debt/EBITDA (x)
net cash
0.15
0.07
0.07
net cash
Net debt/equity (%)
net cash
5.8
2.0
2.1
net cash
Per share
Reported EPS (USD)
2.23c
1.12c
0.69c
0.98c
1.35c
Norm EPS (USD)
2.23c
1.12c
0.69c
0.98c
1.35c
FD norm EPS (USD)
2.23c
1.12c
0.69c
0.98c
1.35c
BVPS (USD)
0.05
0.07
0.07
0.08
0.09
DPS (USD)
0.00
0.00
0.00
0.00
0.00
Activity (days)
Days receivable
28.2
43.7
37.4
37.1
34.1
Days inventory
32.4
40.7
39.7
48.4
46.9
Days payable
19.2
37.9
46.8
57.1
55.3
Cash cycle
41.4
46.6
30.3
28.4
25.7
Source: Company data, Verdhana estimates
Company profileThe company was established on 12 October 1995 under the name of PT Asia Antrasit, which was then changed to PT Harum Energy on 13 November 2007. Harum is a holding company engaged in coal mining with concessions in Kalimantan. HRUM is currently undergoing a transition to become a nickel producer from its investments in multiple nickel assets ranging from (1) PT Infei Metal Industry and PT Westrong Metal Industry, both RKEF smelters, (2) PT Position, a nickel mine, (3), and its investments in Nickel Mines Limited (NIC AU, Not Rated), an Australian listed company with NPI production in Indonesia that has a partnership with Tsingshan. The company went public on 6 October 2010.
Valuation MethodologyWe have a Buy rating on HRUM with a TP of IDR1,870 per share, based on a FY25F SOTP valuation using DCF for the coal and nickel segments. As nickel earnings outpace coal (nickel comprised 79% of our SOTP value), we expect HRUM’s valuation to rerate align with nickel peers. The benchmark index is JCI index.
Risks that may impede the achievement of the target priceDownside risks include 1) a sharp decline in seaborne coal prices, 2) delays in smelter and mine production, and 3) changes in government regulation (related to BLU scheme and/or nickel export regulation).
ESGHRUM realizes the growing importance of ESG and is taking steps to improve transparency as the company prepares its first sustainability report for FY21 to be published in 2022. It is currently in the process of selecting an ESG consultant to strategize ESG-improving initiatives. Furthermore, management’s decision to shift into nickel for long-term sustainability and stopping further investments in coal will enhance HRUM’s ESG profile in the future, in our view. Environmental: (1) HRUM used biofuel for its business operations and has managed to reduce waste generated to 354t (- 42.2% y-y) in FY20. (2) The company continues to explore the possibility of using various alternative energy solutions and plans to install solar PVs. (3) USD1.4mn was spent on environmental management programs during the year including reclamation and revegetation of former mining areas with 2mn trees planted and 2.6ha land reclaimed. Social: (1) THe company has spent IDR2.1bn for community development programs in FY20, which includes donation of school materials, scholarship programs, and Covid related assistance such as masks, and patient beds. (2) Assistance to improve the income level and economic independence of local villages were provided in the form of basic infrastructure construction, utilization of company’s free land for farming, and MSME development to name a few. Governance: (1) HRUM is owned by the Barki family and has two family members on the Board of Commissioners supported by one additional commissioner and 2 independent commissioners. (2) The Board of Directors consists of four people, one of which is an independent director The CEO is highly accessible and informative. Risks: (1) Government regulation changes related to concession license extension and nickel ore export ban may affect operations and profitability. (2) Growing focus on ESG score from investors could pressure valuation multiple.

Fig. 1: Strategic partnership with Tsingshan – indicative ownership pro forma after exercising convertible bond

Source: Company data, Verdhana research

 

Fig. 2: HRUM pro forma nickel (adjusted stake) production post strategic partnership with Tsingshan – still one of the highest production growth among its peer group

Source: Company data, Verdhana estimates

 

Post-transaction ownership structure for HRUM is as follows: 

- PT Position (Mining): 51%

- PT Infei Metal Industry (NPI): 51% 

- PT Westrong Metal Industry (Matte): 41.2% 

- PT Sunny Metal Industry (Matte): 5.4% 

- PT Blue Sparkling Industry (MHP): 26%

Corporate structure details: 

- Post transaction, HNP and THN (HRUM's nickel holdings) will be 51% owned by HRUM and 49% by Eternal Tsingshan (ET).

- The nickel business currently has USD539mn in Mandatory Convertible Note (MCN) to Tsingshan, which will be restructured into USD412mn in MCN and a USD127mn intercompany loan.

- After the MCN conversion, HRUM will reduce its debt by USD412mn.

- This transaction will not dilute HRUM's effective ownership in PT Position, as it also includes HRUM acquiring 51% of NICAP, which owns 49% of PT Position.

What we know about Sunny Metal Industry

The announcement states that HRUM’s nickel business structure includes a 10.55% stake in Sunny Metal Industry (SMI, unlisted) for USD10.55mn. SMI is a four-line RKEF with 55ktpa capacity producing nickel matte. Located in PT Indonesia Weda Bay Industrial Park (IWIP), the plant was commissioned at the end of 2022 with full operations in 2023. By the end of 2022, the lines were owned by Walsin Singapore Pte. Ltd., a subsidiary of Walsin Lihwa Corporation (1605 TT, Not rated), which also owns ~29% of Westrong Metal Industry matte production (WMI, unlisted). In 2022, Walsin invested a total of USD380mn for a 50.1% stake in SMI, implying initial investment of USD758.5mn for 100%, or USD13,791/ton investment.

 

Fig. 3: RKEF smelters capex or investment per ton of capacity – SMI matte facility investment was at ~USD13,800/t

Source: Company data, Verdhana research

 

Fig. 4: HRUM core NPAT (excluding one-off)

Source: Company data, Verdhana estimates
Fig. 5: HRUM net gearing and ROE

Source: Company data, Verdhana estimates

 

Fig. 6: HRUM SOTP valuation

FY25F SOTP by ProjectsImplied gross EV + disc adj (USD mn)EV stake + disc adj (USD mn)Valuation MethodologyFY25F NPAT (exc minority - USDmn)FY25F Implied PE valuationImplied valuation at TPImplied Valuation at TP MethodSOTP (%)Per share
Current business         
Coal business (83%)              422              35112-years DCF - WACC (14.2%)             68            5.2             5.2 PE FY25F (x) 21%           395
PT Infei Metal Industry - RKEF (51%)              274              14020-years DCF - WACC (10.2%)               8          17.1         9,801 EV/ton capacity (USD/t) 8%           158
Westrong Metal Industry - RKEF (41%)           1,059              43620-years DCF - WACC (10.2%)             30          14.7       18,913 EV/ton capacity (USD/t) 26%           491
Sunny Metal Industry - RKEF (5%)              978                5320-years DCF - WACC (10.2%)               3          16.2       17,785 EV/ton capacity (USD/t) 3%             59
Nickel - NIC AU (4.2%) - 30% holding discount           2,717                80Marketcap value           215          12.6           12.6 PE FY25F (x) 5%             90
        
         
Upcoming projects         
PT Position - ore mine (51%)              253              12920-years DCF - WACC (10.2%)               7          17.8              84 EV/resources (USD/dmt-Ni) 8%           145
Blue Spark Energy - HPAL (26%)           1,888              49120-years DCF - WACC (10.2%)              -          28,178 EV/ton capacity (USD/t) 29%           553
          
Total EV           6,614           1,679     100%        1,892
Net Debt/(Cash) - FY24F                 19                  22
Total Net Asset Value (NAV)            1,660             1,870
Per share (IDR/share)                1,870
Source: Company data, Verdhana estimates

 

Fig. 7: Nickel to comprise 79% of the SOTP valuation

Source: Company data, Verdhana research

 

Fig. 8: HRUM assumption changes

Source: Company data, Verdhana estimates

 

Fig. 9: Nickel peer valuation table

Note:  Rated stocks using our estimates, Not rated stocks using Bloomberg Finance L.P. consensus estimates. Pricing as of 7 October 2024.
Source: Bloomberg Finance L.P., Verdhana estimates

 

Fig. 10: HRUM 5Y P/E band

Source: Company data, Verdhana estimates

 

Fig. 11: HRUM flow chart and weightings

Source: KSEI, Verdhana research

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. 

GENERAL DISCLOSURE/DISCLAIMER 
This report is prepared by PT Verdhana Sekuritas Indonesia (“PTVSI”) a securities company registered in Indonesia, supervised by Indonesia Financial Services Authority (OJK) and a member of the Indonesia Stock Exchange (IDX).

This report is intended for client of PTVSI only and no part of this document may be (i) copied, photocopied or duplicated in any form or by any means or (ii) redistributed without the prior written consent of PTVSI.

The research set out in this report is based on information obtained from sources believed to be reliable, but PTVSI do not make any representation or warranty as to its accuracy, completeness or correctness. The information in this report is subject to change without notice, its accuracy is not guaranteed, it may be incomplete or condensed and it may not contain all material information concerning the company (or companies) referred to in this report. Any information, valuations, opinions, estimates, forecasts, ratings or targets herein constitutes a judgment as of the date of this report is published, and there is no assurance that future results or events will be consistent.


This report is not to be construed as an offer or a solicitation of an offer to buy or sell any securities or financial products. PTVSI and its associates, its directors, and/or its employees may from time to time have interests in the securities mentioned in this report or it may or will engage in any securities transaction or other capital market services for the company (companies) mentioned herein.

ANALYST CERTIFICATION
The research analyst primarily responsible for the content of this report and certifies that the views about the companies including their securities expressed in this report accurately reflect his/her personal views.  The analyst also certifies that no part of his/her compensation was, is, or will be, directly, or indirectly, related to specific recommendations or views expressed in this report.


RESTRICTIONS ON DISTRIBUTION

By accepting this report, the recipient hereof represents and warrants that you are entitled to receive such report in accordance with the restrictions and agrees to be bound by the limitations contained herein. Neither this report nor any copy hereof may be distributed except in compliance with applicable Indonesian capital market laws and regulations. 

Rating Table

Rating
Remains
Buy
Target price
Reduced from IDR 1,920
IDR 1,870
Closing price
4 October 2024
IDR 1,405
Implied upside+33.1%
Market Cap (USD mn)1,226.9
ADT (USD mn)1.8

Relative performance chart




Source: LSEG, Verdhana
M cap (USDmn)
1,226.9
Free float (%)
16,552.0
3-mth ADT (USDmn)
1.8
(%)
1M
3M
12M
Absolute (IDR)
6.0
16.1
-17.1
Absolute (USD)
6.0
22.5
-16.3
Rel to Jakarta Stock Exchange Composite Index
8.3
12.3
-26.0

Research Analysts

Michael Wildon Ng (michael.wildon@verdhana.id)

Edward Prima (edward.prima@verdhana.id)

Tags: Coal, HRUM JK, HRUM IJ, Michael Wildon, Edward Prima
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