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INSTITUT TEKNOLOGI BANDUNG

SCHOOL OF BUSINESS AND MANAGEMENT


INDONESIA BUSINESS CASE CENTER (IBCC)

082-05-03-12

Krakatau Steel (A): Financial Performance

Bambang Supriyatno has been diving in capital market for several years. He is an investor with
a moderate risk profile and has to be sure whether he is investing on the right stocks. Checking
the background and the financial record of a company are several things that he always do
before deciding to invest his money on certain stocks. Currently Bambang has been considering
on investing a big amount of money on Krakatau Steel’s stock. What he knows is that this
company is the largest steel manufacturer in Southeast Asia. So he intends to do a background
check on the company.

Company Background

PT Krakatau Steel Tbk is an extremely well-known steel company in Indonesia. In 2009 this
company has become a market leader with domestic market share of 57% in HRC (Hot Rolled
Coil), 32% in wire rod and 33% in CRC (Cold Rolled Coil). PT Krakatau Steel Tbk which was
established in 1970 (officially opened by the Indonesia’s President in 1977) has ten subsidiaries.
Those subsidiaries which have been raised under PT Krakatau Steel Tbk are PT KHI Pipe
Industries, PT Krakatau Wajatama, PT Meratus Jaya Iron & Steel, PT Krakatau Daya listrik, PT
Krakatau Tirta Industri, PT Krakatau Bandar Samudera, PT Krakatau Industrial Estate Cilegon,
PT krakatau Enginering, PT Krakatau IT and PT Krakatau Media.

PT Krakatau Steel Tbk has a long history of doing business in Indonesia, supported by the
diversity and quality of steel products produced. During the operation, PT Krakatau Steel Tbk
has been building a loyal relationship with its customers for more than 20 years. For a big
company who has added great value to the national’s economy, PT Krakatau Steel Tbk is
definitely an asset for Indonesia.

This case was written by Raharsi Dethirafuri under the supervision of Subiakto Soekarno from School of Business
and Management – Institut of Teknologi Bandung. It was prepared solely to provide material for class discussion.
The author does not intend to illustrate either effective or ineffective handling of a managerial situation. The author
may have disguised certain names and other identifying information to protect confidentiality.

IBCC prohibits any form of reproduction, storage or transmittal without its written permission. To order copies or
request permission to reproduce materials, contact IBCC at School of Business and Management – ITB Bulding. Jl.
Ganesha No. 10, Bandung. P. +6222-2531923 F. +6222-2504249 or e-mail to ibcc@sbm-itb.ac.id

Copyright ©2012, Indonesia Business Case Center (IBCC)


INDONESIA BUSINESS CASE CENTER (IBCC)
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First Initial Public Offering (IPO)

In November 2010 PT Krakatau Steel Tbk took a big step. PT krakatau Steel Tbk has been
officially listed in BEI (Bursa Efek Indonesia) with a stock code ‘KRAS’. PT Krakatau Steel Tbk
offers 3.155.000.000 shares to public which is 20% of the paid-up capital. This step is taken in
order to expand its production capacity. PT Krakatau Steel Tbk is planning to use 35,8% of the
IPO (Initial Public Offering) income to add more production machine for achieving the
production target of 3,5 million-ton Hot Rolled Coil per year.

Beside adding more production machine, PT Krakatau Steel Tbk is also planning to use 24,2%
of the IPO income to buy the raw materials (iron ore pellet, scrap, billet and slab), 25% to
finance maturation of 388 hectares land for integrated steel mills project with POSCO) and 15%
to increase the capital investment in two PT Krakatau Steel Tbk subsidiary, PT Krakatau Bandar
Samudera and PT Krakatau Daya listrik.

But during the IPO there has been conflicts going on, the share price was claimed too low. At
first offering (2-4 November 2010), 3.155.000.000 shares were offered at price Rp 850,- per share.
This incident disappointed lots of people. People were outraged by the price that was deemed
inappropriate.

At the same time Ministry of State Owned Enterprises, Mustafa Abubakar and the underwriter
denotes the price of its initial public offering of shares (initial public offering / IPO) of PT
Krakatau Steel is already optimal. President Director of PT Mandiri Sekuritas, Harry M Supoyo,
said, the stock pricing Krakatau Steel cannot only be seen from the absolute value. Stock prices
of steel producers should also be compared with similar companies.

This issue triggers Bambang to do a financial performance measurement of Krakatau Steel


compare to other local steel companies. Bambang decides to compare it to the financial
performance of PT Gunawan Dianjaya Steel and PT Jaya Pari Steel as the steel companies which
were already settled in BEI before PT Krakatau Steel. To assess the financial performance,
Bambang will use several methods.

Trend Analysis

Bambang believes that growth is important for any company. A positive growth rate shows the
capability of the company to maintain the performance of the company. He believes that a
company which has a continuous growth will potentially bring more profit to the investors in
the future. To assess the growth rate each year, a calculation named Compound Annual Growth
Rate (CAGR) is invented. CAGR is the year-over-year growth rate of an investment over a specified
period of time (Investopedia: 2011). CAGR can be calculated through dividing the ending value
to beginning value, raised to the power of 1/(number of years) then subtract it by 1.

V(tn) = Ending Value


V(t0) = Beginning Value

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tn-t0 = Number of years

In analyzing the performance trend of a company, Bambang will use several ratios which can be
classified into four main aspects. Those aspects are revenue, return, market and debt
performance.

Revenue Formula
- Gross Profit margin Gross Profit / Revenue
- Operating Profit Margin Operating Profit / Revenue
- Net Profit Margin Net Income / Revenue
- COGS to Revenue COGS / Revenue
- Operating Expenses to Operating expenses /
Revenue Revenue
Market
- Earnings per share Net Income / Revenue
- Book value per share Equity / Shares Outstanding
Return
- Return on Assets Net Income / Asset
- Return on Equity Net Income / Equity
Debt
- Debt to Equity Debt / Equity
- Debt to Capital Debt / Capital

For the trend analysis Bambang is goint to use year 2007 – 2010 for the three steel companies
(PT Krakatau Steel, PT Gunawan Dianjaya Steel and PT Jayapari Steel). In this trend analysis
Bambang will compare the CAGR of Krakatau Steel to other two local steel companies
mentioned above.

Note: For several ratios the CAGR will use years 2008-2010 due to the CAGR inability to
generate valid data when one value (either ending value or beginning value) has a negative
amount.

BUMN Financial Scoring

Beside Trend analysis Bambang will analyze the financial performance of the three steel
companies through BUMN Financial Scoring framework. This BUMN Financial Scoring
framework is a new framework introduced by the government and based on Keputusan Menteri
Badan Usaha Milik Negara, KEP-100/MBU/2002. Through BUMN Financial Scoring Framework,
performance of company can be classified into three categories such as healthy, less healthy and
unhealthy.

In BUMN Scoring Framework, performance of company is based on three aspects, financial


aspect which contributes 70% of the total score, Operational and administration aspect with
contribution of 15% each. For the financial aspect, the ministry of state-owned company has
approved several financial ratios that are considered to be important in assessing a financial

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performance of a company. There are 8 financial ratios where each of ratios has specific weight
contributed to the overall score.

Financial Indicators Weight Formula


Return on Equity (ROE) 20 Net Income / Equity
Ebitda / (Total Asset – Net Fixed
Return on Investment (ROI) 15
Asset)
Cash Ratio 5 Cash / Current Liability
Current Ratio 5 Current Asset / Current Liability
Account Receivable x 365 /
Collection Period 5
Revenue
Inventory Turnover 5 Inventory x365 / Revenue
Total Asset Turnover 5 Revenue / Asset
Total Equity/Total Asset 10 Equity / Asset
Total Score 70 (Total score is represented as TS)

Note: For the EBITDA, it is gotten from EBIT + Depreciation


Here, the EBIT can be derived from (Income before tax + Interest Expense – Interest Income)

Since Bambang only wants to do a measurement on the financial aspect, Bambang readjusted
the score for health classification as displayed below:

Adjusted
Rating Scoring Classification
Score
AAA TS >95 TS >66.5
AA 80< TS ≤95 56< TS ≤66.5 Healthy
A 65< TS ≤80 45.5< TS ≤56
BBB 50 < TS ≤65 35< TS ≤45.5
BB 40< TS ≤50 28< TS ≤35 Less
B 30< TS ≤40 21 < TS ≤28 Healthy
CCC 20< TS ≤30 14< TS ≤21
CC 10< TS ≤20 7 < TS ≤14 Unhealthy
C TS ≤10 TS ≤7

For the specific score of each ratio will be displayed on Exhibit 1.

Note: The BUMN measurement will be only using the latest year which is year 2010.

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DuPont Formula

To analyze the financial performance of these steel companies Bambang tries to apply the
DuPont analysis. DuPont formula is a common model to measure a company’s financial
performance. DuPont analysis calculates the ROE where in business world it is one of the
important ratios for investors since it gives a brief look on how profitable the company to the
investor’s interest. The higher the ROE, the more attractive the company in the eye of the
investors.

ROE is affected by three things:


- Operating Efficiency (represented by the Profit Margin Ratio)
- Asset used efficiency (represented by Total Asset Turnover)
- Financial Leverage (represented by the Equity multiplier)

ROE = Profit Margin x Total Asset Turnover x Equity Multiplier

DuPont's Formula
Component
Profit Margin Ratio Net Profit /
Revenue
Total Asset Turnover Revenue / Asset
Equity Multiplier Asset / Equity

Note: The DuPont Analysis will be only using the latest year which is year 2010.

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Exhibit 1

Cash Ratio
ROE % ROI %
CR ≥ 35 5
ROE > 15 20 ROI > 18 15 25 < CR ≤ 35 4
13 < ROE ≤ 15 18 15 < ROI ≤ 18 13.5 15 < CR ≤ 25 3
11 < ROE ≤ 13 16 13 < ROI ≤ 15 12 10 < CR ≤ 15 2
9 < ROE ≤ 11 14 12 < ROI ≤ 13 10.5 5 < CR ≤ 10 1
7.9 < ROE ≤ 9 12 10.5 < ROI ≤ 12 9 0 < CR ≤ 5 0
6.6 < ROE ≤ 7.9 10 9 < ROI ≤ 10.5 7.5 Current Ratio
5.3 < ROE ≤ 6.6 8.5 7 < ROI ≤ 9 6 CuR ≥ 125 5
4 < ROE ≤ 5.3 7 5 < ROI ≤ 7 5 110 ≤ CuR < 125 4
2.5 < ROE ≤ 4 5.5 3 < ROI ≤ 5 4 100 ≤ CuR < 110 3
1 < ROE ≤ 2.5 4 1 < ROI ≤ 3 3 95 ≤ CuR < 100 2
0 < ROE ≤ 1 2 0 < ROI ≤ 1 2 90 ≤ CuR < 95 1
ROE < 0 0 ROI < 0 1 CuR < 90 0
Total Equity/Total
Collection Periods Inventory Turnover Asset
CP IT TEA < 0 0
CP ≤ 60 5 IT ≤ 60 5 0 ≤ TEA < 10 4
60 < CP ≤ 90 4.5 60 < IT ≤ 90 4.5 10 ≤ TEA < 20 6
90 < CP ≤ 120 4 90 < IT ≤ 120 4 20 ≤ TEA < 30 7.25
120 < CP ≤ 150 3.5 120 < IT ≤ 150 3.5 30 ≤ TEA < 40 10
150 < CP ≤ 180 3 150 < IT ≤ 180 3 40 ≤ TEA < 50 9
180 < CP ≤ 210 2.4 180 < IT ≤ 210 2.4 50 ≤ TEA < 60 8.5
210 < CP ≤ 240 1.8 210 < IT ≤ 240 1.8 60 ≤ TEA < 10 8
240 < CP ≤ 270 1.2 240 < IT ≤ 270 1.2 70 ≤ TEA < 80 7.5
270 < CP ≤ 300 0.6 270 < IT ≤ 300 0.6 80 ≤ TEA < 90 7
CP > 300 0 IT > 300 0 90 ≤ TEA < 100 6.5
Total Asset Turnover
TATO
TATO > 120 5
105 < TATO ≤ 120 4.5
90 < TATO ≤ 105 4
75 < TATO ≤ 90 3.5
60 < TATO ≤ 75 3
40 < TATO ≤ 60 2.5
20 < TATO ≤ 40 2
TATO ≤ 20 1.5

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Exhibit 2
Income statement and Balance Sheet of Krakatau Steel 2007 – 2010

Income Statement Krakatau Steel 2007-2009 in millions

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Balance Sheet of Krakatau Steel 2007-2009 in millions

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Balance Sheet of Krakatau Steel 2007-2009 (cont’) in millions

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Income Statement Krakatau Steel 2009-2010 in millions

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For the EPS in 2009 use the one which is stated in this income statement (39 IDR/share)

Balance Sheet of Krakatau Steel 2009-2010 in millions

Note: Depreciation in 2010 is as much as 255.412 million IDR

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Balance Sheet of Krakatau Steel 2009-2010 (cont’) in millions

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Exhibit 3
Income Statement and Balance Sheet of Gunawan Dianjaya Steel 2007-2010

For 2007 and 2008, the number of shares outstanding is 4.050.000 and 3.376.000 shares.

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Income Statement of Gunawan Dianjaya Steel 2009-2010

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Balance Sheet of Gunawan Dianjaya Steel 2009-2010

Note: Depreciation in 2010 is as much as 28.298.719.186 IDR

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Exhibit 4
Income Statement and Balance Sheet of Jaya Pari Steel 2007-2010

Income Statement of Jaya Pari Steel 2007-2008

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Balance Sheet of Jaya Pari Steel 2007-2008 in millions

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Balance Sheet of Jaya Pari Steel 2009-2010 in millions

Note: Depreciation in 2010 is as much as 2.014.064.189 IDR

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Income Statement of Jaya Pari Steel 2009-2010

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