Back in Focus

The prolonged economic crisis has prompted many companies to reconfigure their businesses.

IBonWEB.com - The change of political leadership at the end of July 2001 gave cause for hope when the rupiah strengthened against the US dollar. Even though the rupiah has weakened over the past few months, the previous strengthening was good news, particularly for companies that have debt in US dollars.

Jasso Winarto, a capital market analyst, commented there has been little improvement in the first 100 days of Megawati's tenure. In the beginning, many people expected that President Megawati would bring about a marked improvement in the country's economy with the help of her economic "dream team". However, President Megawati's government has yet to make any major achievements, particularly in regard to its intention of kick-starting the ailing economy.

For companies operating in Indonesia, uncertainty on the economic and political fronts has also forced management to think long and hard to find a way out of their problems. One of the problems that must be solved by the many companies is their obligation to repay huge debts this year. The maturity date of both government and private debt this year is a critical step for the country to make good on its recovery program. If the problems cannot be solved in a timely manner, a further perhaps deeper economic crisis must be faced by Indonesia.

Still Good In Difficult Times

United Tractors, a heavy equipment distributor, is one company whose performance has been exemplary, but which is burdened by heavy debt obligations. Established in 1972, the company was initially named Astra Motor Works with Astra International as the majority shareholder. As a supplier of heavy equipment and related services, the company had total assets exceeding Rp5.58 trillion at the end of 200, and gained a reputation as a leading distributor of construction machinery and mining equipment.

Established as a heavy equipment supplier, United Tractors joined with Astra to establish Komatsu Indonesia as a manufacturer and assembler of Komatsu heavy equipment and foundry component. A year later, United Tractors Pandu Engineering was established to manufacture forklifts, transportation equipment and attachments. In 1989, United Tractors went public and listed its shares on the Jakarta and Surabaya Stock Exchanges on September 17, 1989. With 1,545,600,000 listed shares, United Tractors' current shareholder structure is composed of a 50.05% free float and a 49.95% stake by PT Astra
International Tbk.

Currently, the company focuses on three lines of business: namely construction machinery, mining contracting and coal mining, of which construction machinery is the main contributor of revenues as of 2000, as it accounted for almost 50 percent of 2000 revenues. Meanwhile, mining contracting and coal mining contributed 38 percent and 12 percent to revenues, respectively.

In construction machinery, Komatsu, the main brand of United Tractors, held a large market share for the first seven months of this year. "Even though competition is getting tighter, thanks to good cooperation with the principal to provide better support to customers, as of July 2001 Komatsu was still able to hold on to its position as the market leader with 43.2 percent of the total market," said Vice President Director Buntoro Muljono, at a press conference last year. Based on United Tractors' quarterly report in 2001, for the first nine months of 2001 construction machinery recorded revenues of Rp2.24 trillion, or an increase of 24 percent compared to the same period in 2000. Parts and Services that grew by 69 percent drove the revenue growth. However, total equipment sales decreased this year. Lower sales were due to higher competition in a shrinking market on the back the global economic downturn. As a result, gross profit in construction machinery decreased from levels seen in the previous year.

Mining contracting activities of United Tractors are carried out by Pamapersada Nusantara (Pama), which was established in 1989 and which is 100 percent owned by United Tractors. Currently, Pama is engaged in exploration in six coalmines and one gold mine. Thanks to Pama Persada, the division continued to grow this year, recording net revenues of Rp2.29 trillion or 48 percent higher than last year's results. The growth was due to higher production and exchange rate profits. However, Pama recorded lower margins this year due to higher operational costs, such as from the increase in fuel prices and maintenance.

In the company's third business division, coal mining, United Tractors owns a 60 percent stake in Berau Coal. Armadian Tritunggal and Nissho Iwai own the remaining shares, to the tune of 30 percent and 10 percent, respectively. In terms of the division's performance, Berau Coal continued to shine, more than doubling its revenues from September last year. Berau Coal booked revenues of Rp947.7 billion, up from only Rp440.9 billion last year. The increase in revenues was due to better coal prices and also higher coal sales, with production of 5 million tons and exports accounting for 79 percent of the total. However, the cost for opening new areas at Sambarata and higher fuel prices have caused a decrease in the gross profit of Berau Coal compared to last year.

The increase of each division of United Tractors in the first nine months also helped to boost revenues of the holding to a total of Rp5.48 trillion or an increase of more than 44 percent, as compared to the results of the previous year. Gains from foreign exchange rate translation along with higher commodities prices contributed significantly to the company's increased revenues, as most of its revenues are in US dollars.

However, Samuel Sekuritas' Sri Wijayaningrum, a research analyst, commented that although the company's operational performance can be termed as solid, United Tractors must take care of many debt obligations. "This year, the amount of debt that the company must repay by the end of December comes to as much as US$94.3 million and Rp49.8 billion," Wijayaningrum explained. According to Wijayaningrum, the company's liabilities have led to a negative cash flow.

To tackle the debt burden, United Tractors is planning to divest assets in two subsidiaries, Pamapersada Nusantara and Berau Coal. As a part of its liability restructuring, one of the steps that will be taken is through an initial public offering of Pamapersada Nusantara. However, the management of Pamapersada has decided to postpone the initial public offering process. The decision was made based on various considerations, among them the current weakness of the Indonesian stock market. However, it is hoped that the Indonesian economy will turn around some time soon. Weak domestic purchasing power may lead to a lack of liquidity in the secondary market.

Another step to be taken to restructure the company's liabilities is the sale of United Tractors' 60 percent stake in Berau Coal (BC). "The sale of BC represents a rare opportunity to acquire a presence in the Indonesian and Asian coal sector, with substantial reserves and growing capacity with low production costs," stated the President Director of United Tractors, Hagianto Kumala.

Wijayaningrum stated that if the company succeeds in the implementation of its liability restructuring program, United Tractors will focus on its core business, that of construction machinery. Despite an increased focus in this area, the sale of machinery equipment may well decrease, as the rupiah continues to weaken against the US dollar and domestic demand continues to be soft.

Despite the political and economic uncertainty in Indonesia, the implementation of regional autonomy actually appears to be a good opportunity to increase revenues from domestic sales. If each party in the regional authority knows what it should do, local communities will be motivated to increase their investment in infrastructure building to attract investors. Through these activities, United Tractors can maximize sales of construction machinery in the domestic market.

Analyzing the company's fundamentals and the current price of United Tractors' shares, Wijayaningrum recommends the company to middle to long-term as she believes the prospects of the company are strong. KAEZAR MAULANA