KRAS, Rekomendasi beli.

Krakatau Steel



Steel good



Due to higher costs, KRAS's earnings dipped 4% YoY to Rp1,023 bn in FY11. These higher costs owed mainly to higher prices of raw materials, namely iron ore pellets and slabs, which together accounted for almost 45% of the total cost of revenues. Looking forward, the outlook looks brighter. Besides the resumption of production at the HSM Plant last year, the Direct Reduction Plant and the Slab Steel Plant which are being refurbished this year should mean the company can produce more steels. Costs should also be more manageable thanks to additional sponge iron production at its Meratus Jaya Joint Venture and better utilization of the Direct Reduction Plant. Against this backdrop, we revise up our FY12 EPS estimate by 20% to Rp61.7, incorporating the updated timeline for the projects, the latest raw material and steel prices, in addition to setting a new risk free rate of 8.5% compared to 9% previously. BUY maintained with a TP of Rp 950, implying FY12-13 PE of 15.13-14.43x.



Stable revenues expected

FY11 revenues from the sale of steel products were up 18% YoY at Rp 16,235bn, supported by higher blended selling prices which rose 11% YoY. Note that the sale of steel products account for the bulk of the company's total revenues (94% on average in the last five years). Looking forward, production should increase as the 2.4mtpy capacity HSM Plant resumed operations in April 2011 and the Direct Reduction Plant and Slab Steel Plant are expected to fully operate (completion rate of 96.7% and 82.1%, respectively, as of February 2012). However, we only expect a small 3% YoY increase in the sales revenues of steel products to Rp 16,748bn in FY12 since steel prices are expected to be lower. In our estimate, the sales volume will increase by 3% in FY12, lower than the company's estimate of 8%-12%. As for prices, we anticipate the blended price to be 3% lower YoY (the average YTD price of HRC is currently 13% lower than it was in the corresponding period of last year).



Manageable costs will support margins

The additional production of sponge iron at Meratus Jaya, its JV with ANTM, should fully commence in 2Q12, whilst the company's recently refurbished Direct Reduction Plant will be running more productively. As a result, iron ore pellets consumption is expected to decline by 16% this year. We assume an iron ore pellets average selling price for FY12-13 of US$239-238 /ton, or slightly higher than last year's US$232/ ton. We also expect steelmaking cash costs to decline to US$739 715 /ton from US$746 /ton in FY11. With the costs manageable, we forecast the EBITDA margin to improve to 10.7% in FY12. All in all, we expect net earnings to reach Rp 975bn in FY12, or 5% lower YoY since no additional gains on the transfer of fixed assets are expected this year.



Strategic projects are showing good progress

The construction stage for the Blast Furnace Project shall begin in June 2012 and be completed by 2014. The estimated construction cost is above US$500million. With the Blast Furnace as part of its production plant, the company plans to use 70% imported sinter seed and the remaining 30% domestic iron ore. This should translate into more stable prices. The company estimates US$50/ton lower costs. Meanwhile, the land preparation for the Krakatau POSCO JV shall reach its completion stage (an estimated 91.8% at the end of 2012). As of February 2012, the construction stage had reached 13.4%. Commercial operation is expected by 2014. Other infrastructure developments include port development and power plant development with expected completion by 2013. Funding should not be a problem, we believe, since net gearing stood at 36.52% in 2011, meaning the company has room to leverage its balance sheet to fund capex.