Integration sets Indika apart

By webadmin on 10:50 am Feb 02, 2012
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SK Zainuddin

Indika Energy is one of the most integrated coal mining companies in the country, an advantage it is putting to good use as it seeks to grow both revenue and profits. Chief financial officer Aziz Amand talks to GlobeAsia about the outlook for 2012.

The new year has just started but already Aziz Amand is looking forward to an exciting 2012. The finance director of listed integrated energy company Indika Energy is bullish on the prospects for the firm and the industry.

Indonesia’s coal industry is expected to continue to grow by an average of 10% per year for the next few years as global coal prices maintain their current levels and demand from fast-growing economies such as India and China remain robust.

Indonesia now accounts for 65% of India’s coal imports while China is expected to more than double its coal imports over the next three years. The two Asian giants could import more than 300 million tons of coal by 2015 to feed their ever-growing need for energy.
It is against this backdrop that Indonesia’s large coal producers are looking at all ways and means to increase their production. Indika is no different.

Aziz expects the company to continue in 2012 much as it left off last year. For the first nine months of 2011, the company booked net income of $780 million, 90% of full-year net income in 2010. “So it was a very good year for us,” he tells GlobeAsia.
The higher earnings were due partly to higher coal prices, which rose to $120 a ton in the second half of the year, as well as higher demand for coal-related services, which benefited subsidiaries such as Petrosea, Tripatra and PT Mitra Bahtera Sejati (MBSS).

Search for new reserves

Indika is currently the third largest producer of thermal coal in the country, producing 33 million tons per year. Its main export markets include Korea, China, India, Taiwan, Japan and Malaysia. It also sells about 10 million tons each year to Indonesian power plants.

Although the company has coal reserves estimated at 579 million tons, Aziz notes that it is still actively searching for new coal assets. “The team has started work on both organic and non-organic sides and we are undertaking exploration work that is long-term.”

‘We do not want to be in a position that at one time, we are depleting our reserves,” he adds. “Our philosophy is to find new reserves to replace what is currently produced as part of our medium- to long-term strategy.”

To boost its reserves in the short term, the company is looking for brownfield assets  – coal mines which are not operating but which have basic data on proven reserves – where it can provide value added..

It has identified several prospective sites and is currently conducting due diligence before it decides whether to be a contractor or a shareholder in the projects.
 
Vertical integration

Indika’s strongest comparative advantage is its ability to penetrate all segments of the mining industry starting from owning the coal concession to extracting the coal and shipping it on barges.

Its acquisition of a 51% stake in PT Mitra Bahtera Sejati (MBSS), an integrated coal transport & logistics services company, from the Prasatya family for $153 million in April last year was a masterstroke as it positions the company for more aggressive growth this year.
MBSS is Indonesia’s second-largest coal transporter and logistics provider with a large fleet of tug-boats and barges and transshipment facilities. “Our acquisition of MBSS helps us to complete the coal value chain,” notes Aziz.

Petrosea, the mining services firm Indika acquired in 2009, is also poised for strong growth this year. In August 2011, it signed a new contract worth $1 billion with an existing client that stretches for seven years. The full-year impact of that contract will be felt this year.
“Petrosea is the fastest growing company within the group,” notes Aziz. In 2010, it had a turnover of $42 million while for the first nine months of 2011,turnover reached $34 million.

Harry Su, senior vice president and head of research at Bahana Securities, is also bullish on Indika’s outlook. “We expect revenue this year to grow by 24% year on year, helped by the performance of Petrosea and MBSS,” he tells GlobeAsia.

Bahana has forecasted Indika’s total profits to grow 34% year on year to Rp1.6 trillion. “What we like about the company is that it is well integrated and that allows for sustainable growth.”

Given Indika’s strong growth forecast, Bahana has targeted the company’s share price to reach Rp3,200 by year end from its current level of Rp2,550. He warned, however, that as with most other mining companies, execution remains Indika’s biggest challenge. That, and the weather which can play havoc with mining operations.

“If there is too much rain, they can’t mine and if it is too dry, they cannot transport the coal as the river level is too low,” notes Harry.

Aziz adds that global economic uncertainty will also impact the company’s earnings as the turmoil in Europe is likely to impact Asian economies. “Obviously the world has changed from the financial market perspective,” he says. “Liquidity will be an issue but strong growth over the past few years has provided us with a good enough cushion so we should be able to ride out the current uncertainty.”
The company will continue to spend on new investments, but it will do so cautiously. GA