IPCM Is Akin to Marathon Runner 20181023 NHKS Company Report (English)

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Company Visit Note | Oct 23, 2018

Jasa Armada Indonesia Tbk

(IPCM)

Is Akin to Marathon Runner

Not Rated

52 wk range (Hi/Lo) 498/380

Free float (%) 23.1

Outstanding sh.(mn) 5,285

Market Cap (IDR bn) 2,135

Market Cap (USD mn) 141

Jasa Armada Indonesia Tbk | Summary (IDR bn)

2017 2018E 2019E 2020E

Dividend yield 10.5% 2.5% 3.0% 2.8%

YTD 1M 3M 12M

IDR150 billion (+26.5% y-y). It is also heavily reliant on pilotage and towage

services as its revenue’s main driver in 2018. The growth in port traffic correlates

to IPCM’s revenue; thus, the improvement in commodities prices, particularly

coal and crude prices boosting export activities, is potential for increasing IPCM’s

revenues.

Little-Bit-Sanguine IPCM

We estimate that IPCM is likely to post revenue of IDR878 billion (+17.6% y-y)

and net profit of IDR147 billion (+16.8% y-y). Factors underlining our

conservative estimate are 1)The trade war and the rupiah depreciation potential for any changes in policies curbing imports with a view to keep current account deficit in check, 2) Until 6M18, IPCM posting revenue of IDR361 billion or 32.8% of the target, 3) in accordance to the Ministry of Transportation data, traffic containers in ports posting per year average growth of 2.39%, 4) limited number of vessels as setback in increment of services volume.

Traffic in ports has its rush hours; thus, to keep vessels in well-maintained

condition, one vessel should only operate 60% from the total operational hours. This fact urges IPCM to rent vessels with a view to completing its target, sends the cost of partnership to soar, and whittles away gross margin.

Slightly-Below-Average Stock Valuation

Now, IPCM has an attractive valuation as it stocks are traded at a trailing P/E of

4.5x (lower than the one-year average P/E of 4.9x) and a trailing P/B 2.0x (lower

than the one-year P/B of 2.1x).

Firman Hidayat

+62 21 797 6202, ext:170

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Investment Thesis

Zero Debt & prepaid system: IPCM is a company with clean balance sheets because its debt portion is a lot lower than

that of short-term debt, while its debt ratio to equities is 0.1%. IPCM still has large amounts of funds from the Initial Public

Offering (IPO) allocated for business expansions. Besides, its has well-maintained cash flow by applying prepaid system

requiring consumers to deposit first. IPCM is committed to giving the guarantee of zero waiting time for its consumers.

Setback of Coal Shipment: Most of coal miners face sea freight setback due to difficulties in obtaining land acquisition license causing coal mines to have no port. IPCM dominates big ports in Sumatera and Kalimantan and makes the best use of the domination to serve coal freight through river and sea to export markets and areas across Indonesia.

Increase in Tariffs: In 2019, IPCM will hike its service tariffs. The tariffs are not automatically increasing, but the increase occurs every two years. The increase in tariffs should be implemented after undergoing any negotiation by considering the business and economic backdrop. However, the Minister Regulation (Permen) establishing that the minimum margin of 25% is the strength factor as the entrepreneur of captive markets.

Increment in Units : IPCM spends IDR223.85 billion from the proceeds of IPO on purchasing 4 tugs assembled by PT

Citra Shipyard. The time completion for assembling the four tugs is in January 2020. We are sanguine that in the long-term, the

purchasing of four tugs will boost IPCM’s revenue. The purchase implicitly enables IPCM to secure a long-term working contract

(10 years at the minimum) with the oil and gas companies. The projection is based on one vessel’s estimated average payback

period of 6 years and a vessel depreciation period of 30 years.

New Consumers : IPCM is committed to supporting the oil and gas industry in Indonesia by offering ship to ship (STS) services. It has obtained a number of new contracts with oil companies, such as Petrochina and ExxonMobil running since the end of 2018. In the three next years, IPCM is committed to increasing 50% of its market shares (vs. the current market shares of 10%) at the oil and gas STS services.

Number & Type of Vessels | 2018

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COGS Structure

Partnership Costs: Vessel’s rental costs contribute 30%-35% of COGS. The cost is unavoidable because IPCM requires many

vessels to operate during the rush traffic hours from 4 p.m. to 8 p.m., but during the non-rush traffic hours, many vessels are not

operated. Responding to the issue, to date, it decides to rent vessels as an efficient option while waiting the assembly completion of four tugs it purchases.

Employees’ Salary: Prioritizing safety, IPCM hires more employees than the number of employees set forth in the

re-quirement standard. Besides, IPCM is obliged to give salaries pursuant to the salary’s standard applied in the intercontinental

offshore environment. The lack of experts in sea freight makes the issue of taking over employees be unlikely to occur. The

sala-ry expenses contribute 30%-35% from COGS.

Fuel: Fuel expenses contributed 16%-20% to COGS. If the average prices of crude are still lower than IDR15,000/ liter, fuel

expenses will not be a significant issue for IPCM. On the basis of the synergy of state-owned enterprises, it obtains a 25%

dis-count from Pertamina.

Guardian of Commodity and Trade | 2018

Source: Company Data, NHKS Research

Pilotage & Towage Flow Chart | 2018 Investment Risks:

 IPCM’s reliance on quality human resources equipped with years of experiences, particularly vessel’s captains.

 Pelindo II as the parent entity monitoring IPCM’s policymaking.

Risks of any damages and depreciated vessels

Decline in port’s traffic heavily affected by export and import activities

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Rate of Towage Services | 2018

Shareholder Structure | 2018

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COGS Breakdown | 1H18

Clients by Geographic | 1H18

Revenue Breakdown per Segment | 1H18

Revenue Trend (IDR bn) | 2014–2020F

Performance Highlights

Net Profit Trend (IDR bn) | 2014–2020F

Revenue Breakdown per Area | 1H18

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Pelindo II Operating Area (11 Ports) | 2018

Trailling P/B Band | Listing shares to date

Source: Bloomberg, NHKS Research

Trailling P/E Band | Listing shares to date

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Asian Port & Ship Companies

Jasa Armada Indonesia (IPCM) engaging in pilotage and towage services is the subsidiary of state-owned port operator

Pelabuhan Indonesia II (Pelindo II or “IPC”) as the primary and largest port management group in Indonesia.

Running its business in 1960 as the business unit of Port National Company, IPCM merged into a business unit of Pelindo II in

1992. In 2012, Pelindo II launched the new identity of Jasa Armada Indonesia Tbk as IPC. In July 2013, IPC underwent spin-off

and its name was changed into IPC Marine Service.

Under the company’s articles of association, IPCM runs its business in pilotage and towage services, vessel guidance, sea

freight. Now, its main service is pilotage and sewage services.

IPCM’s Competitiveness in Global Markets

Indonesia as a country with a tremendous economic growth and home to the world’s fourth biggest population offers substantial

quantities of export and import activities. The fact is favorable to IPCM because it is potential for boosting IPCM’s revenues

inevitably correlates to the export and import traffic in ports.

IPCM has a lot lower market cap. than do its peers in developed countries such, e.g. Japan, China, and South Korea. However,

we are optimistic that in future years, IPCM is likely to outperform due to the profitable captive markets in Indonesia’s ports. IPCM

succeeds to post the highest net profit margin among its peers. Its relatively cheap stock valuation with a P/E ratio of 4.8x makes IPCM attractive to be collected by investors.

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Summary of Financials

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