Mitrabahtera Segara Sejati Delivering Value (IPO)

Mitra Bahtera Segarasejati (MBSS) provides cost-effective and reliable sea and river based coal transport to Indonesia’s top tier coal producers, which are reaping the benefits of rising domestic and global demand for Indonesia’s coal. Equipped with a sizable and modern fleet of tugs and barges as well as floating cranes and a well-trained workforce, MBSS offers robust growth prospects with stable and sustainable profits.

Beneficiary of rising coal demand
Continued efforts to ramp up Indonesia’s coal production have fired up demand for coal transportation. MBSS, being a market leader in the industry, has been able to capitalise on these opportunities. Indonesia’s total coal production has grown at a CAGR of 12% in the last 5 years, while MBSS has seen its shipment volume expand at a CAGR of 29% over the same period. As of September 2010, MBSS handled 28m tonnes of coal through barging and floating cranes.

Strong clientele
MBSS’ client list consists of well-known and sizeable coal producers such as Kaltim Prima Coal, Adaro Indonesia, Berau Coal, Indo Tambangraya Megah, Tambang Batubara Bukit Asam and others, which together represents more than 50% of Indonesia’s total coal production. These same clients are sitting on more than 5bn tonnes of coal reserves and are continuously ramping up production volume, which give rise to more business opportunities for MBSS going forward.

Growing market potential
MBSS not only ships coal for coal producers but also to end-customers such as power plant and cement producers. Therefore, MBBS stands to tap on more potential customers as more power plants are in the pipeline (32 power plants for the 1st phase of a 10,000MW project).

Sustainable business with attractive margin
As MBSS’ shipping services are based on long-term contracts, these generate a more stable and quantifiable revenue stream. Additionally, MBSS also enjoys the flexibility of passing through any fluctuation in the price of fuel, which is a major cost component (c.30%), thus providing a stable gross margin of above 30%.

Valuation
Using the DCF method, our estimated equity value for MBSS is IDR3,940bn, which implies 13.3x-11.2x 2011-12f earnings and 13.2x-8.4x 2011-12f EV/EBITDA, assuming a WACC of 12.7% and terminal growth rate of 5%. The key risks to our valuation are: i) cancellation of its coal delivery contracts, ii) delay in adding new vessels; and iii) higher than expected financing cost.

PLENTY OF EXCITEMENT

Speedy expansion on track
Since its inception in 1994, MBSS has continuously enlarged its fleet. Its current fleet comprises 51 tugs and 47 barges, and 4 floating cranes, with ages averaging 5 years for the former and 2 years for the latter. MBSS carries out regular maintenance to ensure that all equipment is kept in optimal operating condition. It plans to add up a total of 30 tugs and barges for 2011 and 2012, spurred by robust demand for coal shipment services.

Capable of catering to rising demand
Heightening activities in Indonesia’s coal industry, either for export or domestic purposes, is driving up demand for sea transportation of coal. Consequently as a key industry player, MBSS is in a good position to chart impressive growth. In 2009, MBSS delivered a total of 19.2m tonnes of coal through the provision of barging services and handled 9.8m tonnes of coal through its floating cranes, representing a CAGR of 29% for the last 5-year period. Note that Indonesia’s coal production grew at a CAGR of 12% over the same period.

Top-tier clientele
MBSS’ customers comprise top-tier coal producers in Indonesia such as Kaltim Prima Coal, Adaro Indonesia, Kideco, Berau Coal, Indo Tambangraya Megah, Tambang Batubara Bukit Asam and others, which produced a combined more than 50% of Indonesia’s total coal pro duction in 2009, and which have total coal reserves of more than 5bn tonnes. Users of coal such as cement companies like Indocement and Holcim Indonesia are also its clients. With these existing customers are on track to boost production together with rising demand for coal in the domestic market, MBSS’ business prospects look promising going forward.

Robust volume growth; sizeable portion under contract
As most of the projected volume is already under contract, especially for floating crane services. MBSS intends to add new tugs and barges or floating crane units only when a contract is secured, which limits the risk of idle capacity. As most of the volume growth estimated is under contract, we believe the risk of failing to achieve the company’s targeted volume is minimal.

Attractive and sustainable margin business
Over the years, MBSS has been generating attractive gross margins from its barging and floating crane services, chalking up gross margin of above 40%. Despite the huge margins, most coal producers, especially the bigger ones, still need to assign several contractors to serve them in order to focus on their core business as well as evaluate each contractor’s capability and efficiency.

As such, we believe MBSS would be able to garner higher demand from its existing customers and new ones alike given its expertise and proven track record. On top of that, as shipping companies in Indonesia are assigned a final tax rate of 1.2%, MBSS’ effective corporate tax rate of under 10% compares favourably with the general corporate tax rate of 28%-30%.

Solid reputation and track record
The coal shipment business is not a highly complicated business in which there are low entry barriers for new players. However, a track record and a sound reputation have a huge influence on customers in choosing their business partner. Backed by its historically strong achievements and sizeable market share, MBSS continues to get business from its existing customers as well as new ones.

With a management team that possesses an average 15 years’ experience and a well-trained crew, as well as well-maintained fleet, MBSS is able to provide cost-efficient and timely coal shipping services to its clients, which sets it apart from its competitors. MBSS’ total barging and floating crane volume of 29.6m tonnes in 2009, accounting for 11% of total national production during the period, is a reflection of its strong presence in the industry.

Key beneficiary of the cabotage principle
MBSS provides a comprehensive range of services that include shore-based storage and barge loading, river and sea-based transport to off-shore loading of ocean-going vessels. Being a national company, MBSS will be the key beneficiary of the government’s cabotage regulation. This regulation, implemented in order to support national companies in the maritime industry, in general requires that all sea activities in Indonesia be performed by Indonesian-flagged ships that are manned by Indonesian crew.

As a result, any foreign companies that intend to participate in local trade can only do so in form of Joint Ventures, with a maximum ownership of 49%. This ruling will be fully enforced in 1Q2011.

Profit & loss forecast
Strong top line growth
Attributable to added capacity, we estimate MBSS’ revenue to surge by 35% for 2011 and further by 18% in 2011. Both barging and floating crane volume will accelerate by 27% and 12% to 48.7m tonnes and 54.8m tonnes respectively for 2011-2012.

Substantial gross margin
With most of the revenue already secured under contract, we believe MBSS’ gross margin remains wide as any fluctuation in the price of fuel, one of the key components of cost with 30% contribution, can be passed on. We are estimating a gross margin of above 40% for both 2011 and 2012.

Upbeat earnings increase
Owing to the strong top line growth and sustainable margin, MBSS’ net profit is set to advance by 60% in 2011 to Rp295bn and further by 19% in 2012 to Rp351bn.

Balance sheet forecast

Gradually lowering the debt ratio
MBSS’ net gearing ratio has historically stayed well below 1x, which reflects the company’s prudent leverage policy and strong cash generation. Going forward, with its profit set to rise further, we estimate that MBSS’ net gearing ratio will gradually drop to below 0.5x, which is the mark of a solid and healthy balance sheet.

Huge capex spending for 2011-2012 to support expansion
With delivery contracts already on hand, MBSS is on the verge of strengthening its fleet with 15 more sets of tugs and barges each year for the next two years. In 2010, MBSS allocated a hefty capex to build another floating crane in order to beef up coal handling volume. This was financed by funds from its IPO proceeds, debt raising and internal cash.

Earnings sensitivity
Our sensitivity analysis reveals that for every 5% adjustment in coal price, our earnings estimate for 2011 and 2012 will change by 12%, while every 5% revision in sales volume will impact each of our earnings estimates for 2011 and 2012 by 5%.

VALUATION

Valuation methodology
We are using the DCF valuation, which we believe is the most appropriate to value MBSS given its highly visible revenue stream that is mostly secured by contract. Such a method would be able to capture the longer term impact of sustained growth in MBSS. The DCF valuation is based from the following assumptions:

•Risk-free rate of 8.5%
•Equity risk premium of about 5%
•Terminal beta of 1.0x
•IDR cost of debt of 12%
•WACC of 12.7%
•Terminal growth rate of 5%

Based on this valuation, we arrive at an equity value of IDR3,940bn for MBSS, which implies 13.4-11.2x 2011-12F earnings and 13.2-8.4 2011-12F EV/EBITDA. We believe such multiples are relatively undemanding given the company’s robust outlook and the overall vibrant coal industry.

Sensitivity analysis
We conducted several sensitivity analyses on our estimate of MBSS’ equity value to changes with the following variables:

Discount rate
Based on our sensitivity analysis, the estimated equity value of MBSS is relatively sensitive to any changes on WACC assumption although the change is not following the same pattern. For instance, an increase in WACC of 1% will lower the equity value by 15.6% while a decrease of WACC by 1% will elevate the equity value by 20.4%.

Terminal growth rate
Sensitivity analysis on our terminal growth rate assumption threw up the same results as with WACCs as the changes in the assumption leads to a double digit adjustment on the equity value although not in a similar pattern.

Industry comparison
Currently there are no clear-cut comparables but pitted against its closest peers in the market, MBSS stands above the rest in terms of profitability as well as balance sheet position. A comparison to other coal services companies also shows that MBSS’ multiples are still undemanding.

INDUSTRY OUTLOOK

Growing coal industry
In the last 5 years, Indonesia’s coal production has increased at a CAGR of 11.7%, with more than 75% of the total volume exported due to lukewarm domestic demand. This eventually propelled Indonesia to become one of the biggest coal exporters in the world. Nevertheless, domestic demand will be a precursor for growth in the coming years as Indonesia is currently intensifying the development of power plants to support the country’s robust economic growth.

Glowing outlook for coal
Demand for coal is set to increase in the coming years due to: i) surging domestic demand from newly developed coal-fired power plants, and ii) rising demand from China and India.

Domestic demand leaps
The lack of significant developments of power plants has given rise to an electricity shortage in Indonesia and modest growth in domestic demand for coal. However, as the government has plans to develop a total of 10,000MW coal-fired power plants as part of major efforts to boost the country’s electrification ratio from the current 66%, domestic demand for coal is expected to soar. The state electricity company, PLN, is aiming for this ratio to reach 90% by 2018. Consequently, demand for coal from PLN is expected to surge at a CAGR of 23.6% within the next 5 years (2010-2014).

Asia will experience the highest growth in coal consumption
Based on a report by global consultancy AME, coal imports from China and India will grow at a CAGR of 27% from 2001-2011 while that for the rest of the world will be 3%. A report from Wood Mackenzie, quoted by miningweekly.com, expects that by 2011, China would overtake Japan as the world’s largest thermal coal importer. But by 2019, India’s demand for imported thermal coal will outpace China’s.

India’s demand for coal is expected to increase by manifold within the next 5 to 10 years due to the completion of coal-fired power plants and demand from the metallurgical and other industries. Wood Mackenzie estimated that India’s coal demand will increase by 810m tonnes (+137%) by 2025, driven by a 158% surge in coal-fired power capacity.

Robust prospects for coal transport and logistics services
Given the growth prospects for coal, the demand for coal transport and logistics services from coal producers and coal end-users will rise in tandem. Specifically, Indonesia, being an archipelago, is heavily dependent on maritime transportation for its logistics, including coal.

RISK FACTORS

1. Cancellation of coal delivery contracts.
At present, as MBSS’ business is based on long-term contracts ranging from 1 year up to 8 years, any cancellation of existing contracts or its inability to extend the contracts when due will negatively impact on the company’s performance.

2. Delay in new vessels shipment or maintenance.
Our assumption is based on MBSS’ ability to receive its new fleet as scheduled. Any delay in vessels arrival or in the maintenance process will derail the company’s growth projections.

3. Climate uncertainties
Coal production and barging activities rely heavily on favorable weather. Consequently, any extreme weather changes will negatively affect coal production volume as well as delivery volume.

4. Force Majeure
When a coal producer declares force majeure, it can avoid the obligation to honor a contract. However, such an event may lead to a service contractor such as MBSS ending up with idle capacity and losing revenue.

5. Financing risks
MBSS utilizes debt from financial institutions in financing its fleet expansion. As such, any sharp fluctuation in interest rates might add pressure on the company’s earnings.

6. Competition
MBSS’ competitors include similar coal shipment companies as well as ones that are directly owned by coal mining companies. Although some portion of the company’s projected volume is secured under contract, there still risk of the new contract volume falling short of our estimates.

COMPANY PROFILE

MBSS, established in 1994, provides river and sea-based coal transport services to key players in Indonesia’s coal mining industry, local and international coal traders and coal end-users. Its services range from shore-based storage and barge loading, river and sea-based transport to offshore loading of ocean-going vessels. From its humble beginnings in 1994, MBSS has expanded its fleet to 51 tug boats, 47 barges and 4 floating cranes that are of relatively young age and state-of-the-art to ensure it delivers timely and cost-efficient services to its customers. Accordingly, MBSS’ coal delivery volume increased to an estimated market share of 11% in 2009.

Investment Agreement
On 14 June 2010, MBSS issued a USD5m non-bearing interest convertible bond to Accion Capital Management. The CB, which can be converted into 43,761,639 MBSS shares, representing 2.4% of its total enlarged outstanding shares at a conversion price of IDR1,047 per share, matures in July 2013. The CB conversion period starts from 18 July 2010 until maturity. MBSS would be able to redeem the bond should any illegality arise, at a 40% premium.

Option Agreement

On 26 Nov 2010, PT Patin Resources, Ingrid Ade Sundari Prasatya and Patricia Pratiwi Suwati Prasatya, all of whom are shareholders of MBSS (Seller), with PT Indika Energy Tbk or its affiliates (Buyer), entered into an Option Agreement that give right to buyer to purchase 51% of the total shares issued and fully paid after the Initial Public Offering (IPO) which are owned by the Seller. This agreement is valid for 6 (six) months from the listing of the Company’s shares on the Indonesia Stock Exchange.