AKR Corporindo (AKRA IJ): Boosted by B20 implementation

We’ve recently visited AKR Corporindo, a fuel and chemical logistic company. Below are the key takeaways.

• 4Q18: positive impact from B20 implementation. As B20 started to be implemented in Sep-18, the effect to petroleum segment, especially industrial diesel had yet to be seen until 4Q18. The first immediate impact was increased volume by ~20% YoY/QoQ to 0.57 mn kl in 4Q18 as the govt cut the number of appointed distributors who can import petroleum and sell B20 products, from 30-40 to 18 companies. This inevitably reduce industry competition, while also reducing diesel leakage from subsidized to unsubsidized, which arose from sizable gap between them. Throughout FY18, subsidized diesel ASP, which is set at IDR5,150/l, is ~40% lower than non-subsidized diesel.
• Beneficiary of expected lower oil price in FY19. Brent price is currently in a downward trend, from USD82.7/bbl in Sept-18 to USD53.8/bbl in Dec-18, and is expected to rally moderately in FY19, averaging about ~USD70/bbl. As such, we expect the ASP of domestic non-subsidized diesel to follow those downtrends in FY19, which will benefit AKRA in two ways: 1) discouraging leakage from subsidized to unsubsidized due to lower ASP gap between them, and 2) lifting gross margin, as AKRA implements fix margin policy, which ranging between IDR500-750/l for diesel products. As for FAME component, CPO price volatility has neutral impact to AKRA and can be passed on to the customers.
• Aviation JV with BP to commence operation in 2H19. Following establishment of aviation JV with Air BP, AKRA, which has 50.1% on the JV, is currently on track to commence operation in 2H19 as the JV has already received temporary IUNU (wholesale) license. Despite higher level of profitability (GPM >30%) and double-digit annual growth, Indonesian avtur market has high barrier to entry as: 1) new players technically can’t compete with Pertamina in Angkasa Pura (AP) operated airport, and 2) new players must provide operational insurance of USD1bn. By establishing JV with Air BP, AKRA is in good position to untap opportunities in non-AP operated airport with strong technical and supply support from Air BP. Nevertheless, we should expect sizable financial contribution to arise in the next 3-4 years.
• Bullish outlook towards FY19. AKRA aims 7-12% petroleum volume growth from 2.15 mn kl in FY18 to 2.3-2.4 mn kl in FY19 on the back of coal mining sector, as it expect higher SR and OB removal from its clients, which mostly produce upper middle CV coal. AKRA also targets to build 20-30 gas stations in Jakarta and Surabaya in FY19. As for basic chemicals segment, AKRA expects 10-15% demand growth in FY19.
• Seems to be undervalued, with potential positive surprise. Assuming 30ha of industrial land sales (JIIPE) in FY19, while ignoring any non-operating income/expense, AKRA is now trading at FY19F P/E of 19.1x, -1.8SD below its average SD of 24.8x in the past five years. Our estimate hasn’t included the possibility of 100-200 ha JIIPE land purchase by Freeport for smelter construction.