Krakatau Steel (A)SituationBambang Supriyanto has been diving in capital market for several years. He is an investor with a moderate risk profile and has to be sure whether he is investing on the right stocks. He always checking the background and the financial recored of a company before deciding to invest his money on certain stocks. Currently Bambang has been considering on investing a big amount of money on Krakatau Steels stock.PT Krakatau Steel Tbk is an extremely well-known steel company in Indonesia. In 2009, Krakatau steel company has become a market leader with domestic market share of 57% in HRC (Hot Rolled Coil), 32% in wire rod and 33% in CRC (Cold Rolled Coil). PT Krakatau Steel Tbk is established in 1970 and has ten subsidiaries. PT Krakatau Steel Tbk has been building a loyal relationship with its customers for more than 20 years. In November 2010 PT Krakatau Steel TBK has been officially listed in BEI (Bursa Efek Indonesia) with a stock code KRAS. PT Krakatau Steel Tbk offers 3.155.000.000 shares to public which is 20% of the paid-up capital. This step is take order to expand its production capacity. They planning to use 35,8% of the IPO income to add more production machine for achieving the production target of 3,5 million-ton HRC per year. Beside that PT Krakatau Steel Tbk is also planning to use 24,2% of the IPO income to buy the raw materials, 25% to finance maturation of 388 hectares lad for integrated steel mills project with POSCO, and 15% to increase the capital investment in two PT Krakatau Steel Tbk subsidiary, PT Krakatau Bandar Samudera nad PT Krakatau Daya Listrik. But during IPO the share price was claimed too low. At first offering, 3.155.000.000 shares were offered at price Rp 850,- per share. This incident disappointed lots of people. People were outraged by the price that was deemed inappropriate. At the same time Ministry of State Owned Enterprises, Mustafa Abubakar and the underwriter denotes the price of its initial public offering of shares of PT Krakatau Steel is already optimal.This issues triggers Bambang to do a financial performance measurement of Krakatau Steel compare to other local steel companies. The local companies is PT Gunawan Dianjaya Steel and PT Jaya Pari Steel as the steel companies which were already settled in BEI before PT Krakatau Steel. And to assess the financial performance, Bambang use 3 method : Trend Analysis, BUMN Financial Scoring, and DuPont Formula.

Analysis1. Trend Analysis A positive growth rate shows the capability of the company to maintain the performance of the company. A company which has a continuous growth year over year of course will potentially bring more profit to the investors in the future. Compound Annual Growth Rate (CAGR) is invented to assess the growth rate each year. CAGR can be calculated through dividing the ending value to beginning value, raised to the power of 1/(number of years) subtract it by 1. The function is :CAGR() = - 1V() = Ending ValueV() = Beginning Value - = Number of YearsIn analyzing the performance trend of a company, there is several ratios which can be classified into 4 :RevenueFormula

Gross Profit MarginGross Profit / Revenue

Operating Profit MarginOperating Profit / Revenue

Net Profit MarginNet Income/ Revenue

COGS to RevenueCOGS / Revenue

Operating Expenses to RevenueOperating expenses / Revenue

Market

Earnings per shareNet Income / Revenue

Book value per shareEquity / Shares Outstanding

Return

Return on AssetsNet Income / Asset

Return on EquityNet Income / Equity

Debt

Debt to EquityDebt / Equity

Debt to CapitalDebt / Capital

The result after use year 2007 2010 for the three steel companies : PT Krakatau Steel Krakatau Steel

2007200820092010CAGR

Gross Profit MarginGross Profit / Revenue11.95%13.16%7.01%15.04%7.98%

Operating Profit MarginOperating Profit / Revenue5.34%6.59%0.15%6.68%7.75%

Net Profit MarginNet Income / Revenue2.11%2.23%2.92%7.15%50.16%

COGS to RevenueCOGS / Revenue88.05%86.84%92.99%84.96%-1.19%

Operating Expenses to RevenueOperating Expenses / Revenue6.60%6.57%6.86%8.36%8.17%

Earnings per shareNet Income / Shares Outstanding 31.00 36.00 39.20 81.31 37.91%

Book value per shareEquity / Shares Outstanding 402.09 431.04 460.05 711.12 20.93%

Return on AssetsNet Income /Asset2.82%2.99%3.87%6.04%28.94%

Return on EquityNet Income / Equity6.18%8.45%8.52%11.43%22.78%

Debt to EquityDebt / Equity 1.19 1.82 1.20 0.88 -9.59%

Debt to CapitalDebt / Capital 0.54 0.64 0.54 0.46 -5.06%

PT Gunawan DianjayaDianjaya Steel

2007200820092010CAGR

Gross Profit MarginGross Profit / Revenue21.01%18.54%-11.45%17.36%-6.16%

Operating Profit MarginOperating Profit / Revenue14.86%13.80%-16.63%12.05%-6.74%

Net Profit MarginNet Income / Revenue7.76%2.75%-9.14%10.02%8.92%

COGS to RevenueCOGS / Revenue78.99%81.46%111.39%82.64%1.52%

Operating Expenses to RevenueOperating Expenses / Revenue6.15%4.73%5.24%5.31%-4.78%

Earnings per shareNet Income / Shares Outstanding 38.02 24.59 (25.98) 20.91 -18.08%

Book value per shareEquity / Shares Outstanding (2.44) 51.30 82.10 111.78 47.61%

Return on AssetsNet Income /Asset18.19%3.97%-15.45%15.95%-4.28%

Return on EquityNet Income / Equity-1555.56%47.92%-31.64%26.55%-25.57%

Debt to EquityDebt / Equity (86.52) 11.08 1.05 0.66 -75.52%

Debt to CapitalDebt / Capital 1.01 0.92 0.51 0.40 -26.66%

PT Jayapari SteelJaya Pari Steel

2007200820092010CAGR

Gross Profit MarginGross Profit / Revenue16.17%15.75%11.69%13.03%-6.96%

Operating Profit MarginOperating Profit / Revenue12.82%13.42%6.70%8.98%-11.19%

Net Profit MarginNet Income / Revenue9.60%6.71%0.63%6.65%-11.53%

COGS to RevenueCOGS / Revenue83.83%84.25%88.31%86.97%1.24%

Operating Expenses to RevenueOperating Expenses / Revenue3.35%2.32%4.99%4.05%6.49%

Earnings per shareNet Income / Shares Outstanding 55.42 65.54 2.56 37.93 -11.88%

Book value per shareEquity / Shares Outstanding 294.15 359.70 362.25 400.18 10.81%

Return on AssetsNet Income /Asset15.46%12.31%0.54%6.92%-23.53%

Return on EquityNet Income / Equity18.84%18.22%0.71%9.48%-20.47%

Debt to EquityDebt / Equity 0.22 0.48 0.30 0.37 19.25%

Debt to CapitalDebt / Capital 0.18 0.32 0.23 0.27 14.67%

Krakatau SteelDianjaya SteelJayapari Steel

CAGRCAGRCAGR

Gross Profit MarginGross Profit / Revenue7.98%-6.16%-6.96%

Operating Profit MarginOperating Profit / Revenue7.75%-6.74%-11.19%

Net Profit MarginNet Income / Revenue50.16%8.92%-11.53%

COGS to RevenueCOGS / Revenue-1.19%1.52%1.24%

Operating Expenses to RevenueOperating Expenses / Revenue8.17%-4.78%6.49%

Earnings per shareNet Income / Shares Outstanding37.91%-18.08%-11.88%

Book value per shareEquity / Shares Outstanding20.93%47.61%

10.81%

Return on AssetsNet Income /Asset28.94%-4.28%-23.53%

Return on EquityNet Income / Equity22.78%-25.57%

-20.47%

Debt to EquityDebt / Equity-9.59%-75.52%19.25%

Debt to CapitalDebt / Capital-5.06%-26.66%14.67%

If we compare the CAGR of Krakatau Steel with DIanjaya Steel and Jayapari Steel than we can assume that the growth of the Krakatau Steel is in a good growth. For example : Based on CAGR for profit, Krakatau Steel had a very good growth while other top 3 showed the downward trend.

2. BUMN Financial ScoringBUMN Financial Scoring framework is a new framework introduced by the government and based on Keputusan Menteri Badan Usaha Milik Negara, KEP-100/MBU/2002. Through BUMN Financial Scoring Framework, performance of company can be classified into three categories such as healthy, less healthy and unhealthy. In BUMN Scoring Framework, performance of company is based on three aspects, financial aspect which contributes 70% of the total score, Operational and administration aspect with contribution of 15% each. For the financial aspect, the ministry of state-owned company has approved several financial ratios that are considered to be important in assessing a financial performance of a company. There are 8 financial ratios where each of ratios has specific weight contributed to the overall score.

For the EBITDA, it is gotten from EBIT + Depreciation, the EBIT can be derived from (Income from tax + Interest Expense Interest Income). The score for health classification :

BUMN measurement will only using the latest year which is year 2010.WeightedKrakatau SteelDianjaya SteelJaya Pari Steel

201020102010

Return on Equity (ROE)Net Income / Equity20%11.43%1626.55%209.48%14

Return on Investment (ROI)EBITDA / (Total Asset - Net Fixed Asset)15%13.77%1229.34%1510.65%9

Cash RatioCash / Current Liability5%60.51% 5 0.89% - 12.17%2

Current RatioCurret Asset / Current Liability5%177.29% 5 169.03% 5276.83%5

Collection PeriodAccount Receivable x 365 / Revenue5% 31.11 5 20.08 5 79.87 4.5

Inventory TurnoverInventory x 365 / Revenue5% 160.92 3 118.86 4 99.58 4

Total Asset TurnoverRevenue / Asset5%84.49%3.5159.15%5104.01%4

Total Equity / Total AssetEquity / Asset10%52.85%8.560.09%872.98%7.5

Total Score70% 58 6250

Rating (Adjusted Score)AAAAA

From the table we can see the top 3 rating of healthy company is all good and healthy company. The Krakatau Steel and the Dianjaya Steel the compare to the Jayapari Steel is better.3. DuPont FormulaDuPont formula is a common model to measure a companys financial performance. DuPont analysis calculates the ROE since it gives a brief look on how profitable the company to the investors interest. The higher the ROE, the more attractive the company in the eye of the investors. ROE is affected by three things: - Operating Efficiency (represented by the Profit Margin Ratio) - Asset used efficiency (represented by Total Asset Turnover) - Financial Leverage (represented by the Equity multiplier)The equation isROE = Profit Margin x Total Asset Turnover x Equity Multiplier

DuPont analysis will be only using the latest year.Krakatau SteelDianjaya SteelJaya Pari Steel

201020102010

Profit Margin RatioNet Profit / Revenue7.15%10.02%6.65%

Total Asset TurnoverRevenue / Asset84.49%159.15%104.01%

Euity MultiplierAsset / Equity189.20%166.42%137.03%

ROE11.43%26.55%9.48%

From the table the ROE PT Krakatau Steel compare to Jayapari Steel gained more profit. But, if compared to PT Dianjaya Steel, the PT Krakatau Steel gained less profit. The financial performance of Krakatau Steel is behind Dianjayas although it is better than Jayaparis.ConclusionSince two out of three of tools for analysis the financial performance of the PT Krakatau Steel show good result. It means that the PT Krakatau Steel is worth investing. And Bambang can invest happily.