KRAKATAU STEEL (B) :

GLOBAL COMPETITION
SYNDICATE GROUP 10
INTRODUCTION

• Krakatau Steel, the biggest steel company in Indonesia intends to conduct a global competition, with to compete
with other global steel companies.

• Firstly, make a joint venture with POSCO, the biggest steel company in South Korea.

• Then, Anto as a financial analyst make an assessment to find a appropriate company as a benchmark.
 COMPARISON COMPANIES WITH PT.
KRAKATAU STEEL
Local Steel Companies Global Steel Companies
1. PT. Gunawan Dianjaya Steel Tbk. 1. Arcelor Mittal (Luxemburg)
2. PT. Jaya Pari Steel Tbk. 2. POSCO (South Korea)
3. U.S Steel (United States)

• Moody’s Corporation is a reputable company which provide credit ratings, research, tools and analysis that contributes to
transparent financial markets.
• Moody’s also creates financial rating for steel industry that is used to measure the financial performance of steel industry
globally.
• The Moody’s assessment use three years financial statement data of 2008,2009, and 2010.

• In this rating methodology, there are four categories that Moody is focusing, are:
• Size and Business Profile
• Operating Performance and Volatility
• Financial Policies
• Financial Strength

• To analyze using Moody’s, there are seven rating categories :

• Below are the key rating factors including the weight score of each categoty :
MOODY’S GLOBAL STEEL MEASUREMENT
RESULT
Krakatau Steel
  Scoring Rating Categories Sub-factor Weighting Weighted Factor Score
2008 2009 2010

1 Net Consolidated Sales (in million) $ 6125,20 Baa 3 25% 0,75

2 Operational Diversity
1 Size and Business profile
3 Regional Diversity 5 A 4 10% 0,4

4 Import Threat/Export Reliant

1 Ebit Margin 6,20% B 1 10% 0,1

2 Operating Performance and Volantility 2 Return on Average Tangible Assets 7,22% Baa 3 5% 0,15

3 Volatility based on the coeffiecient 2,19% Aaa 5 10% 0,5

1 Debt/Capital 46,20% Baa 3 15% 0,45

3 Financial Policies
2 Debt/EBITDA 5,85 Caa 0 10% 0

1 Ebit/Interest 3,01 Ba 2 5% 0,1

4 Financial Strength 2 CFO-Div/Debt 9,28% Aaa 6 5% 0,3

3 FCF/Debt 4,41% Ba 2 5% 0,1

Total 2,75

Rating Baa3
MOODY’S GLOBAL STEEL MEASUREMENT
RESULT
Gunawan Dianjaya Steel
  Scoring Rating Categories Sub-factor Weighting Weighted Factor Score
2008 2009 2010

1 Net Consolidated Sales (in million) $ 744,85 Caa 0 25% 0

2 Operational Diversity
1 Size and Business profile
3 Regional Diversity 3 Baa 3 10% 0,3

4 Import Threat/Export Reliant

1 Ebit Margin 9,70% Baa 3 10% 0,3

2 Operating Performance and Volantility 2 Return on Average Tangible Assets 14,93% A 4 5% 0,2

3 Volatility based on the coeffiecient 0,96% Aaa 6 10% 0,6

1 Debt/Capital 38,45% A 4 15% 0,6

3 Financial Policies
2 Debt/EBITDA 4,03 B 1 10% 0,1

1 Ebit/Interest 5,04 Baa 3 5% 0,15

4 Financial Strength 2 CFO-Div/Debt 4,45% Caa 0 5% 0

3 FCF/Debt 1,98% B 1 5% 0,05

Total 2,25

Rating Ba1
MOODY’S GLOBAL STEEL MEASUREMENT
RESULT
Jaya Pari Steel
  Scoring Rating Categories Sub-factor Weighting Weighted Factor Score
2008 2009 2010

1 Net Consolidated Sales (in million) $ 171,05 Caa 0 25% 0

2 Operational Diversity
1 Size and Business profile
3 Regional Diversity 2 Ba 2 10% 0,2

4 Import Threat/Export Reliant

1 Ebit Margin 24,01% Aa 5 10% 0,5

2 Operating Performance and Volantility 2 Return on Average Tangible Assets 30,17% Aaa 6 5% 0,3

3 Volatility based on the coeffiecient 0,02% Aaa 6 10% 0,6

1 Debt/Capital 26,97% Aa 5 15% 0,75

3 Financial Policies
2 Debt/EBITDA 2,04 Baa 3 10% 0,3

1 Ebit/Interest 64,76 Aaa 6 5% 0,3

4 Financial Strength 2 CFO-Div/Debt 54,28% Aa 5 5% 0,25

3 FCF/Debt 11,98% Baa 3 5% 0,15

Total 3,2

Rating Baa2
MOODY’S GLOBAL STEEL MEASUREMENT
RESULT
POSCO
  Scoring Rating Categories Sub-factor Weighting Weighted Factor Score
2008 2009 2010

1 Net Consolidated Sales (in million) $ 118220,00 Aaa 6 25% 1,5

2 Operational Diversity
1 Size and Business profile
3 Regional Diversity 7 Aa 5 10% 0,5

4 Import Threat/Export Reliant

1 Ebit Margin 11,93% Baa 3 10% 0,3

2 Operating Performance and Volantility 2 Return on Average Tangible Assets 10,05 A 4 5% 0,2

3 Volatility based on the coeffiecient 2,12% Aaa 6 10% 0,6

1 Debt/Capital 48,30% Baa 3 15% 0,45

3 Financial Policies
2 Debt/EBITDA 2,94 Baa 3 10% 0,3

1 Ebit/Interest 11,12 Aa 5 5% 0,25

4 Financial Strength 2 CFO-Div/Debt 19,87% Ba 2 5% 0,1

3 FCF/Debt 10,27% Baa 3 5% 0,15

Total 4,2

Rating A2
MOODY’S GLOBAL STEEL MEASUREMENT
RESULT
Arcelor Mittal
  Scoring Rating Categories Sub-factor Weighting Weighted Factor Score
2008 2009 2010

1 Net Consolidated Sales (in million) $ 268071,00 Aaa 6 25% 1,5

2 Operational Diversity
1 Size and Business profile
3 Regional Diversity 7 Aa 5 10% 0,5

4 Import Threat/Export Reliant

1 Ebit Margin 5,50% Ba 2 10% 0,2

2 Operating Performance and Volantility 2 Return on Average Tangible Assets 3,76% Ba 2 5% 0,1

3 Volatility based on the coeffiecient 4,97% Aaa 6 10% 0,6

1 Debt/Capital 52,00% Ba 2 15% 0,3

3 Financial Policies
2 Debt/EBITDA 7,21 Caa 0 10% 0

1 Ebit/Interest 6845,33 Aaa 6 5% 0,3

4 Financial Strength 2 CFO-Div/Debt 12,18% B 1 5% 0,05

3 FCF/Debt 9,68% Baa 3 5% 0,15

Total 3,55

Rating A3
MOODY’S GLOBAL STEEL MEASUREMENT
RESULT
United Steel
  Scoring Rating Categories Sub-factor Weighting Weighted Factor Score
2008 2009 2010

1 Net Consolidated Sales (in million) $ 39470,00 Aaa 6 25% 1,5

2 Operational Diversity
1 Size and Business profile
3 Regional Diversity 6 Aa 5 10% 0,5

4 Import Threat/Export Reliant

1 Ebit Margin 3,29% B 1 10% 0,1

2 Operating Performance and Volantility 2 Return on Average Tangible Assets 2,77% Ba 2 5% 0,1

3 Volatility based on the coeffiecient 1,43% Aaa 6 10% 0,6

1 Debt/Capital 74% Ba 2 15% 0,3

3 Financial Policies
2 Debt/EBITDA 12,19 Caa 0 10% 0

1 Ebit/Interest 2,49 B 1 5% 0,05

4 Financial Strength 2 CFO-Div/Debt 3,64% Caa 0 5% 0

3 FCF/Debt 2,33% B 1 5% 0,05

Total 3,15

Rating Baa2
SIZE AND BUSINESS PROFILE

• Net Consolidated Sales.

• Ranking-wise, Krakatau Steel surpassed both of its local competitor but it needs to work on its revenue
more to match with the other three international companies. Difficulties might occur due to the increasing
exchange rate of USD to rupiah.

• Operational and Regional Diversity, Import Threat/Export Reliant.

• The data for this subfactor is already given by the case, and similar to the previous subfactor, Krakatau
Steel has a better score compared to the other two local companies, but still has a lot of work to do in order
to catch up with other international companies, but overall, with a grade 1 point higher than the half point
mark (4), Krakatau steel fares quite well in this subfactor.
OPERATING PERFORMANCE AND VOLATILITY

• Ebit Margin
• EBIT (Earnings Before Interest and Taxes) Margin compares the ratio of operating income a company receives to its revenue. Unfortunately,
Krakatau Steel ranked one level below its local competitors. There’s quite a gap in the percentage as well. When compared to international
companies, Krakatau ranked almost on the same level as Arcelor, one level below PASCO and one level above US Steel. The ratio can be
increased by decreasing COGS, decreasing operating expense or increasing the overall sales.
• Return on Average Tangible Assets.
• This ratio specifies which assets become the denumerator when compared to EBIT/operating income due to the nature of the steel industry.
Krakatau Steel ranks below its two local competitors, but fares quite well compared to the international companies except PASCO, which ranks
the highest in Global Companies. If Krakatau manages to increase its EBIT through the means mentioned in (1), this ratio will increase as well.
• Volatility based on the Coefficient of Variation of CFO/Net Sales
• This ratio is used by investors to select the type of investment matches to their liking. Moody uses the coefficient of variation of cashflow for
operation per net sales to measure a company’s volatility because it compares the actual cash used for the operation to the sales company
generates. In overall, Krakatau Steel ranked quite high, defeating its two local competitors and two international company, but still on par with
Arcelor. When compared percentage-wise, Krakatau is slightly lower than Arcelor by 2%.
FINANCIAL POLICIES

• Debt-to-Capital Ratio
• The debt-to-capital ratio gives analysits and investors a better idea of a company’s financial structure and whether
or not the company is a suitable investment. All else being equal, the this ratio the riskier the company; the debt-
to-capital ratio of Krakatau Steel still in reasonable range compared with local and global companies in this
industry. Jaya Pari Steel have the lowest ratio, while US Steel is the highest.

• Debt-to-EBITDA
• Debt/EBITDA is a ratio measuring the amount of income generated and available to pay down debt before
covering interest, taxes, depreciation, and amortization expenses. Debt/EBITDA measures a company’s ability to
pay off its incurred debt. A high ratio result could indicate a company has a too-heavy debt load. Krakatau Steel
higher compare to other two local companies, while global companies way high compare to local companies
except POSCO.
FINANCIAL STRENGTH

• EBIT/Interest
• An EBIT/Interest ratio below 1.5 is considered to be unsustainable in long term, while a ratio of less than 1 will require immediate attention. In
general, the higher this ratio is, the better the financial health of the company. The EBIT/Interest of Krakatau Steel higher compare to two local
companies, while global companies way higher than local companies except POSCO that only have 2,94%.

• CFO-div/debt.
• This would tell us how many years it would take the business to pay off all of its debt if it were to devote all cash flow generated from
operations to repaying debt. The higher the ratio the better financial position from a firm/business have. The ratio varies from different
companies.

• FCF/debt
• Free cash flow to debt is a ratio that shows the fraction of all debt that would be repaid in one year if all of the free cash flow went to repaying
debt. It allows investor to see the company’s financial stability. The higher the ratio, way to easy the company to pay their debt or incur more
debt. FCF/debt ratio of Krakatau steel higher than Gunawan but lower than Jaya pari that have the highest ratio in local companies. While
POSCO have the highest ratio in global companies and the US Stell have the lowest ratio.
ANALYSIS

• Looking at PT. Krakatau Steel Company’s performance so far by the financial statement and those scores, it is
proved that this company are still capable to compete and growing in the long-term. In addition, this company
reach the sore Baa3, which indicates that this company signified as healthy company.

• If this analysis is used as decision base wheter to invest or not, Anto should invest in Krakatau Steel as their
Moody’s rating score is better than other Industries. As we can see, from average year 2008 to 2010, Krakatau
Steel Moody’s rating score is Baa3.
CONCLUSION

• The result outcome shows that PT. Krakatau Steel score is Baa3 (1.65). Compared to other local company, PT.
Jaya Pari Steel score the highest. POSCO however has scored Baa1 (3.35), therefore financial strength of PT.
Krakatau Steel needs to be improve if compared with POSCO and they wanted to ensure balance in joint
venture.

• To be the best in the global competition, PT. Krakatau Steel needs to expand it’s market share and join venture
with a global company is a must. Based on the calculation, joint venture and collaboration with POSCO is a
great opportunity for PT. Krakatau to initiate a healthy global competition.
THANK YOU