KimEng AKR Corporindo Recovery signs come into sight

Indicated recovery in 2Q09
Management indicated a recovery in 2Q09 financial performance compared to 1Q09, driven by improvement in petroleum distribution and manufacturing businesses. The main cause is rebounded oil price (US$58.7 per barrel in 2Q09 vs. US$40.61 per barrel in 1Q09), which translates into higher selling price oil price distribution. Meanwhile, sales volume of petroleum distribution also increased. Kalimantan market was the driver for petroleum distribution sales volume growth. In manufacturing, higher sales volume of sorbitol and derivative products was supported by strong demand in domestic market. Overall, the management expects 1H09 results will be announced by end July 2009.

Still main driver: Petroleum distribution and manufacturing business
We expect earnings growth to stay firm on the back of the petroleum distribution and manufacturing divisions. Kalimantan, having major customers in coal mining sector, is expected to be the driver for petroleum distribution. Management expects sales volume in Kalimantan this year to contribute 55% (600,000 Kiloliters) from target sales volume this year of 1,100,000 Kiloliters (up 64% from 652,000 Kiloliter in FY08). Yet, conservatively, we still maintain our sales volume petroleum distribution of 800,000 Kiloliter this year. In manufacturing division, the company is focusing on expanding the capacity of its production plant (derivatives products
and tapioca starch) in Sorini Agro Asia Corp (subsidiary). As a result, sales volume of derivatives and tapioca starch is expected to grow 15% each this year.

Projects still on track
Management said the company is still on track on development of several projects, as follows: 1) Completion of terminal storage tanks in Koja is expected in 4Q09, 2) Expansion in derivative product in Sorini is expected to complete in 4Q09, 3) Expansion in tapioca starch gradually by 45,000ton to 120,000 ton, expected to be finished in 2010. Management budgets capex for the projects of US$90m this year. We see the capex is above our expectation, especially the remaining capex for terminal storage tanks this year of around US$60m vs our expectation at US$50m. However, we are not concerned that higher capex will disturb the company cash flow, as the company obtained loan facilities from International banks to finance terminal storage
tanks’s capex. We expect the new loan will increase the company’s gearing ratio to 1.1x end 2009 from 0.75x in 1Q09.

Retain BUY, with TP at Rp1,030
We are positive on indicated recovery of AKR financial performance in 2Q09 compared to 1Q09, supported by higher price and sales volume of oil distribution, and higher sales volume in Sorini especially in domestic market. However, we still maintain our estimates despite recovery in 2Q09. We are likely to upgrade our estimates if recovery looks stable and sustainable. Therefore, We retain our fair value with TP Rp1,030 (equals to 12.1x 2009 P/E and 8.7x 2010 P/E).