AKR, Oil, Deregulation Tailwinds, CLSA

Fuel distributor and logistics play AKR is a direct beneficiary of higher fuel prices. The company’s 25% 3 year fuel volume CAGR is driven by unsubsidised fuel sales to industrial customers. AKR is in a prime position to benefit from an eventual end to fuel subsidies in Indonesia and its plans to enter coal logistics create value. Despite its small cap status, AKR has been recognised for its high corporate governance. On the back of these tailwinds we raise our target price to Rp5,000 and rec to BUY.

Direct beneficiary of higher oil prices
AKR is a direct beneficiary of higher fuel prices with 57% of gross profits coming from fuel distribution in East Indonesia, mainly to coal miners. The company has high operating leverage for its fuel sales with gross profits a steady 4% of fuel turnover. We raise our oil price assumption to US$118/bbl Sing gas oil which raises our ASP by 15% to Rp 7,874/L (from Rp6,873/L). This raises 12CL and 13CL earnings by 9% and 8% respectively.

Retail fuel has major growth potential
A reduction in fuel subsidies in Indonesia during 1H12 brings us a step closer to a deregulated retail fuel market, presently planned for 2014. Indonesia remains underpenetrated in terms of fuel outlets with nearly half the number of neighbouring Philippines on a per capita basis, and we estimate AKR’s fuel outlets could grow at least 6-fold over the ensuing 4 years. Our 25% 3 year fuel volume CAGR is currently driven by industrial fuel sales growth only.

Coal logistics value accretive
AKR is planning to increase its stake in South Kalimantan based coal logistics play Jabal Nor to 60% from 30% by the end of 1Q12. The Jabal Nor project includes plans to construct a 28km haul road and 25Mt inland coal terminal for 3rd party coal logistics charging US$8/t usage fee. AKR’s existing logistics footprint and execution track record make this a logical acquisition. In our view the 60% stake adds Rp600/sh to our valuation for AKR.

Upgrade our target price to Rp5,000 and recommendation to BUY
AKR has a strong execution track record and demonstrated management discipline by divesting Sorini in 1Q11. Despite its US$1.6b market cap has a net cash balance sheet able to underwrite its expansion plans. We raise our target price to Rp5,000/sh reflecting a 1x PEG for its distribution business combined with DCF valuations of its new coal mining and coal logistics divisions. Upgrade recommendation to BUY.

Download file : Indonesia AKR 050312