CLSA AKRA, potential M and A ahead for SOBI?

Our research associate Vera maintains her OPF rating on Aneka Kimia (AKRA IJ). Maintain TP at Rp1,600.

Petroleum business has been growing very rapidly since AKRA entered into this business back in 4Q05. For subsidized fuel, downstream regulator BPH Migas has awarded AKRA the right to distribute 101k KL subsidized fuel in 2011. This equals to only 0.3% of the country’s total subsided fuel market, implying a further potential growth. And still tiny compared to expected 1.6m KL volume AKRA is going to distribute next year, but almost double last year’s volume. I guess it is worth remembering that subsidized fuel makes up about 60% of Indonesia’s petroleum market.

Another interesting way to look at AKRA is the potential M&A for subsidiary Sorini (SOBI IJ). In the short run, SOBI might see their margins under pressure with rising input costs (lagging effect since the input costs have been rising too fast). But SOBI is still a great asset. SOBI is the second biggest sorbitol manufacturer in the world. The company is also the key earnings contributor for AKRA (30% in 2011F CL).

Moreover, the purchase of this company by a key competitor will boost the pricing power. Another possibility is the purchase of SOBI by a vertically integrated operator. For a deal to happen, the price has to be at a decent premium. Assuming 25-30% premium from current share price for controlling stake, this would translate into Rp3,500-3,700/share price for SOBI. AKRA currently controls 69.5% of SOBI and a deal would mean around US$250mn cash to their pocket. Nice…

Key points from the report:
Maintain OPF on AKRA, the largest private petroleum distributor in Indonesia as well as the leader Sorbitol producer worldwide.
· Petroleum business: will continue to display strong growth, forecasted to be 20% CAGR in the next three years.

· A potential M&A on SOBI is also foreseeable and this will unlock value. Divesting SOBI would be viewed positively by the market since it would leave the company as a more focused on fuel distribution, the fastest growing business segment.