FINANCE MANAGEMENT

KRAKATAU STEEL (A): FINANCIAL PERFORMANCE

I. BACKGROUND

PT Krakatau Steel Tbk is an extremely well-known steel company in Indonesia. In 2009

this 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
which was established in 1970 (officially opened by the Indonesia’s President in 1977) has
ten subsidiaries. PT Krakatau Steel Tbk has a long history of doing business in Indonesia,
supported by the diversity and quality of steel products produced. During the operation, PT
Krakatau Steel Tbk has been building a loyal relationship with its customers for more than 20
years. For a big company who has added great value to the national’s economy, PT Krakatau
Steel Tbk is definitely an asset for Indonesia.

Beside adding more production machine, PT Krakatau Steel Tbk is also planning to use
24,2% of the IPO income to buy the raw materials (iron ore pellet, scrap, billet and slab),
25% to finance maturation of 388 hectares land 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 and PT Krakatau Daya listrik.

But during the IPO there has been conflicts going on, the share price was claimed too
low. At first offering (2-4 November 2010), 3.155.000.000 shares were offered at price Rp
850,- per share. At the same time Ministry of State Owned Enterprises, Mustafa Abubakar
and the underwriter denotes the price of its initial public offering of shares (initial public
offering / IPO) of PT Krakatau Steel is already optimal. This issue triggers Bambang to do
a financial performance measurement of Krakatau Steel compare to other local steel
companies. Bambang decides to compare it to the financial performance of PT Gunawan
Dianjaya Steel and PT Jaya Pari Steel as the steel companies which were already settled in
BEI before PT Krakatau Steel.
II. ANALYSIS
To know the Financial Performance of Krakatau Steel there are several method such as
Trend Analysis, BUMN Financial Scoring, and DuPont Formula to find the best financial
performance of each company. This measurement will compare with other local steel
companies in Indonesia. Bambang decides to compare PT Krakatau Steel Tbk with PT
Gunawan Dianjaya Steel and PT Jaya Pari Steel.

a. Trend Analysis

Trend analysis is use to analyze the company continuos growth. The better growth rate of
one company, describe the stability of company performance. Continuous growth will
potentially bring more profit to the investors in the future. To assess the growth rate each
year, a calculation named Compound Annual Growth Rate (CAGR) is invented. CAGR can
be calculated through dividing the ending value to beginning value, raised to the power of
1/(number of years) then subtract it by 1.

V(tn) = Ending Value

V(t0) = Beginning Value
tn-t0 = Number of years

In analyzing the performance trend of a company with CAGR using several ratios which can be
classified into four main aspects. Those aspects are revenue, return, market and debt performance.
 PT. Krakatau Steel PT. Gunawan Dianjaya Steel PT. Jaya Pari Steel

Revenue Formula 2007 2008 2009 2010 2007 2008 2009 2010 2007 2008 2009 2010
1. Gross Profit Gross Profit/
Margin Revenue 11,9% 13,2% 7,0% 15,0% 21,0% 18,5% -11,4% 17,4% 16,2% 15,7% 11,7% 13,0%
2. Operating Profit Op Profit/
Margin Revenue 5,34% 6,59% 0,15% 6,68% 14,9% 13,8% 6,2% 12,1% 12,8% 13,4% 6,7% 9,0%
Net Profit/
3. Net Profit Margin Revenue 2,1% 2,2% 2,9% 7,2% 7,8% 2,7% -91,4% 10,0% 9,6% 6,7% 0,63% 6,6%
4. COGS to COGS /
Revenue Revenue 88,1% 86,8% 93,0% 85,0% 79,0% 81,5% 111,4% 82,6% 83,8% 84,3% 88,3% 87,0%
5. Operating Expenses
to Revenue OER/ Revenue 6,6% 6,6% 6,9% 8,4% 6,1% 4,7% 5,2% 5,3% 3,4% 2,3% 5,0% 4,0%
Market
Net Income/
1. Earning per Share Revenue Rp31 Rp46 Rp39 Rp81 Rp38.024 Rp24.585 Rp26 Rp21 Rp55,4 Rp65,5 Rp2,56 Rp37,93
2. Book Value per Equity/ Shares
Share outstanding 2,54 2,72 2,90 589,15 no data no data 0,58 0,79 2,94 3,6 3,62 4,0
Return
Net Income/
1. Return on Assets Asset 2,8% 3,0% 3,9% 6,0% 18,2% 4,0% -15,5% 16,0% 15,5% 12,3% 0,54% 6,9%
Net Income/
2. Return on Equity Equity 6,2% 8,4% 8,5% 11,4% no data no data -31,6% 26,5% 18,8% 18,2% 0,71% 9,5%
Debt

1. Debt to Equity Debt/ Equity 87,7% 158,0% 119,7% 87,78% no data no data 104,7% 66,4% 21,8% 48,0% 30,3% 37,0%

2. Debt to Capital Debt/ Capital 40,0% 55,9% 54,3% 46,40% no data no data 51,1% 39,9% 17,9% 32,4% 23,2% 27,0%
From the calculation above, we can use the data to know the CAGR of each aspects. The
higher company CAGR value, the better financial performance of each company. The
calculation of CAGR presented below :

PT. Krakatau PT. Gunawan PT. Jaya Pari

Revenue Steel Dianjaya Steel Steel
1. Gross Profit Margin 8,0% -6,2% -7,0%
2. Operating Profit Margin 7,7% -6,7% -11,2%
3. Net Profit Margin 50,2% 8,9% -11,5%
4. COGS to Revenue -1,2% 1,5% 1,2%
5. Operating Expenses to Revenue 8,2% -4,8% 6,5%
Market
1. Earning per Share 37,7% No data -11,9%
2. Book Value per Share 514,6% No data 10,8%
Return
1. Return on Assets 28,9% -4,3% -23,5%
2. Return on Equity 22,8% No data -20,5%
Debt
1. Debt to Equity 0,02% No data 19,3%
2. Debt to Capital 5,0% No data 14,7%

From this data we can know the result of three company analysis above. PT Krakatau Steel
Tbk have the best performance value due to its stability in growth of financial performance
because the value of CAGR in the PT Krakatau still is better than the others. For several
aspects like gross profit margin, operating profit margin, net profit margin, return on assets
and return on equity the value of CAGR is better when it high and in aspects cogs to revenue,
operating expense to revenue, debt to equity and debt to capital the value of CAGR is better if
the value is low.

b. BUMN Financial Scoring Framework

To calculate BUMN Financial Scoring Framework, we should know some ratio so we

can get the result. Financial ratio as a benchmark for scoring the Financial Scoring
Framework is
 a. Return of Equity e. Collection Period
b. Return of Investment f. Inventory Turnover
c. Cash Ratio g. Total Asset Turnover
d. Current Ratio h. Total Equity to Total Asset

PT. Krakatau Steel PT. Gunawan PT. Jayapari Steel

Dianjaya Steel
Financial Indicators Ratio Score Ratio Score Ratio Score
Return on Equity (ROE) 11,4% 16 26,5% 20 9,5% 14
Return on Investment
13,8% 10,5 29,3% 15 10,6% 9
(ROI)
Cash Ratio 60,5% 5 0,9% 0 12,2% 2

Current Ratio 177,3% 5 169,0% 5 276,8% 5

Collection Period 31,11 5 20,08 5 79,87 4,5

Inventory Turnover 160,9 3 118,9 4 99,6 4

Total Asset Turnover 84,5% 3,5 159,1% 5 104,0% 4
Total Equity / Total Asset 52,9% 8,5 60,1% 8 73,0% 7,5
Total Score 56,5 62,00 50
 For this measurement on the financial aspect, there are some rating to know what is
the classification of the company. The rating is presented below :

Adjusted
Rating Scoring Classification
Score

AAA TS >95 TS >66.5

AA 80< TS ≤95 56< TS ≤66.5 Healthy

A 65< TS ≤80 45.5< TS ≤56

BBB 50 < TS ≤65 35< TS ≤45.5

BB 40< TS ≤50 28< TS ≤35 Less

B 30< TS ≤40 21 < TS ≤28 Healthy

CCC 20< TS ≤30 14< TS ≤21

CC 10< TS ≤20 7 < TS ≤14 Unhealthy

C TS ≤10 TS ≤7

The rating and classification to this three steel company is showed below :

PT. Gunawan
PT. Krakatau Steel PT. Jayapari Steel
Dianjaya Steel
Total score 56,5 62 50
Rating AA AA A
Classification Healthy Healthy Healthy

From data above, the best result of BUMN health classification is :

1. PT Gunawan Dianjaya Steel placed first and reached 62 as the highest total score, got
AA grade rate which classified it as an Healthy company. That being said, this
company is a very potential company for Bambang or for any other investor to invest
their money in this company. ROI ratio show that Bambang will received 26,5%
profit later also ROE ratio show that he will get 29,3% net income returned as a
percentage of shareholder equity a year after his investments. The rest analysis of the
 financial ratios have shown that the company are able to give profit and benefit to the
investor later in the future.
2. From the financial ratios analysis and scoring, PT Krakatau Steel reach 56,5 as the
total score, AA as the rating and classified as Healthy company which placed them
into the second places. Eventhough it classified as a Healthy company, but it has
lower score than PT Gunawan Dianjaya Steel. ROI ratio show that Bambang will
only receive 11,4% profit and ROE ratio show that he will only get 13,8% net
income returned as a percentage of shareholder equity. The rest of the financial ratios
analysis of this company are mostly good, but it is better to invest in a better
company which means company that gives you a better result like PT Gunawan
Dianjaya Steel
3. PT Jayapari steel have the lowest score, that is 50 so the rating that Jayapari get is A
and the classification are the same like the two other companies which means
Healthy. Unfortunately, They can only give 9,5% profit payback and 10,6% net
income from the invested money. That being said, why bother investing in lower
performances company when you have higher company to invest.
So, Based on the analysis we conclude that PT. Gunawan Dianjaya Steel is the best
company to invest becaise it has the highest financial performances and worth to invest.

c. DuPont Formula

DuPont Formula is a common model to measure a company’s financial performance.

DuPont analysis calcultes the ROE where in business world it is one of the important ratios
for investors since it gives a brief look on how profitable the company to the investor’s
interest. The higher ROE, the more attractive the company in the eye of the investors.
 PT. Krakatau Steel PT. Gunawan Dianjaya Steel PT. Jaya Pari Steel
DuPont's
Component Formula 2007 2008 2009 2010 2007 2008 2009 2010 2007 2008 2009 2010
Profit
Margin Net Profit/
Ratio Revenue 2,1% 2,2% 2,9% 7,2% 7,8% 2,7% -9,1% 10,0% 9,6% 6,7% 0,6% 6,6%
Total Asset Revenue/
Turnover Asset 133,5% 134,2% 132,2% 84,5% 234,4% 14,4% 16,9% 159,1% 161,0% 183,5% 85,6% 104,0%
Equity Asset/ No No
Multiplier Equity 219,1% 282,6% 220,4% 189,2% Data Data 204,7% 166,4% 121,8% 148,0% 130,3% 137,0%
No No
ROE 6,2% 8,4% 8,5% 11,4% Data Data -3,2% 26,5% 18,8% 18,2% 0,7% 9,5%
 From data above, the best result of DuPont Formula is PT Gunawan Dianjaya Steel
because the total score from all aspects is the highest than the others steel company. Where
Gunawan Dianjaya Steel Company gets a point of 26.5%, for Karakatau Steel gets a point of
11.4% and the smallest is Jaya Pari Steel with a point of 9.5%, so it can be interpreted that the
company PT Gunawan Dianjaya Steel has the capability to manage its assets in 2010 and can
also find out the general description of financial leverage that is how much the debt value in
establishing and building the company. This can be petrified for investors who want to invest
in PT Gunawan Dianjaya Steel company in investing as investors know how much profit or
profitability opportunity in PT Gunawan Dianjaya Steel company.
III. CONCLUSION
1. In Trend Analysis measurement PT Krakatau Steel Tbk have the best score than the
others steel company. So from this analysis PT Krakatau Steel is the best choice to
the investor to invest.
2. From BUMN Financial Scoring Framework PT Krakatau Steel Tbk have a good
rating and classification like PT Gunawan Dianjaya Steel, but the total score of PT
Krakatau Steel Tbk not higher than PT Gunawan Dianjaya Steel.
3. From DuPont analysis PT Krakatau Steel Tbk ROE is not higher than PT Gunawan
Dianjaya Steel. So from this analysis PT Gunawan Dianjaya Steel will more catch the
investor attention.

IV. RECOMENDATION
Based on three analysis that Mr. Bambang wanted to do, the best company is PT
Gunawan Dianjaya Steel, because from this three analysis they have the best result from two
analysis BUMN Financial Scoring and DuPont Analysis. From duPont analysis, we
recommend Mr. Bambang to invest in Gunawan Dianjaya Steel. They have the highest result
among another, so as an investor we should find the best perfomance and with 26,5% of ROE
the company has good financial performance among the other.
 KRAKATAU STEEL (B) : GLOBAL COMPETITION

I. BACKGROUNG
Krakatau Steel as the biggest steel company in Indonesia, wants to take another step to
going global. The company having corporation with POSCO, the biggest steel company in
South Korea to make a joint venture. Therefore, Anto, a financial analyst in PT Krakatau
Steel, would like to see the position and the opportunity of PT Krakatau Steel Tbk to compete
with other global steel companies.
Anto will use three reputable global steel companies which come from different region in
the world. Those three companies are Arcelor Mittal (Luxembourg), POSCO (Pohang Iron
and Steel Company, South Korea), and U.S. Steel (United States Steel Company). Besides
that, Anto will also use PT Gunawan Dianaya Steel Tbk and PT Jaya Pari Steel TBk as local
companies.
Moody’s Corporation is a reputable company which provides credit ratings, research, tools
and analysis that contributes to transparent financial markets. Moody’s also creates financial
rating for steel industry that is used to measure the financial performance of steel industry
globally. This methodology encompasses companies whose revenue is generated from selling
and producing semi-finished and finished steels.

II. ANALYSIS
To analyse the position and the opportunity of PT Krakatau Steel Tbk to compete with
other global steel companies there is a method from Moody’s corporation. To assess the
Moody’s assessment, financial statements of 2008, 2009 and 2010 are needed. Some of the
ratios in Moody’s Global Steel measurement are using data of three years while other ratios
only use the data of 2010. In this rating methodology, there are four categories that Moody
is focusing. Those categories are:
1. Size and Business Profile
2. Operating Performance and Volatility
3. Financial Policies
4. Financial Strength

These four categories are broken down into ten sub factors with their respective factor
weights. This will be demonstrated in the tables below.
 For analysis of these four categories, Moody’s use seven rating categories ranging from
Caa to Aaa. Caa is the worst rating a company can achieve while Aaa is the highest one.

Aaa Aa A Baa Ba B Caa

6 5 4 3 2 1 0
Moody’s global steel assessment for global steel companies
Sub factor POSCO Arcelor Mittal US Steel
No Factor Sub factor
weighting Value Rating Value Rating Value Rating
Net Consolidated Sales
25% 53.43 Aaa 78 Aaa 17.37 A
(most recent year end)
Size & Business Operational Diversity
1
Profile Regional Diversity
10% 7 Aa 7 Aa 6 A
Import Threat/ Export
Reliant
EBIT Margin (3 year
10% 12.34333 Baa 3.816667 Ba -0.99 Caa
average)
Return on Average
Operating Tangible Assets (3 year 5% 25.30% Aaa 8.40% Baa 6.50% Baa
2 Performance & average)
Volatility
Volatility based on the
Coefficient of Variation of 10% 32.10% A 9.70% Aaa 2.30% Aaa
CFO/Net Sales
Debt/Capital (most recent
15% 48.60% Baa 52.30% Ba 74.90% Ba
year end
3 Financial Policies
Debt/EBITDA (3 year
10% 2.9 Baa 7.2 Caa 17.1 Caa
average)
EBIT/Interest (3 year
5% 11.1 Aa 2.5 Ba 2.5 Ba
average)
4 Financial Strength CFO-Div/Debt (3 year
5% 62.10% Aaa 12.20% B 2.60% Caa
average)
FCF/Debt (3 year average) 5% -10.90% Caa 1.30% B 0.70% B

Total 100% 4.3 3.45 2.75

Overall Rating 100% A Baa Ba
Moody’s global steel assessment for local (Indonesian) steel companies
Sub Gunawan Dianjaya Jaya Pari Steel Krakatau Steel
No Factor Sub factor factor
weighting Value Rating Value Rating Value Rating
Net Consolidated Sales 25% 0.199 Caa 0.05 Caa 1.741 B
(most recent year end)
1 Size & Business Profile Operational Diversity
Regional Diversity
10% 3 Baa 2 Ba 5 A
Import Threat/ Export
Reliant
EBIT Margin (3 year 10% 14.30% Baa 10.60% Baa 6.20% Ba
average)
Return on Average
Operating Performance Tangible Assets (3 year 5% 115.80% Aaa 279% Aaa 29.70% Aaa
2 average)
& Volatility
Volatility based on the
Coefficient of Variation 10% 4.70% Aaa 10.70% Aaa 4.50% Aaa
of CFO/Net Sales
Debt/Capital (most recent 15% 39.90% A 27% Aa 47.10% Baa
year end
3 Financial Policies
Debt/EBITDA (3 year 10% 2.8 Baa 2 Baa 5.9 Caa
average)
EBIT/Interest (3 year 5% 7.4 A 64.2 Aaa 3 Ba
average)
4 Financial Strength CFO-Div/Debt (3 year 5% 10.60% B 48.30% Aa 9.30% Caa
average)
FCF/Debt (3 year
5% 11.60% Baa 56% Aaa -4.90% Caa
average)
Total 100% 2.8 3.3 2.3
Overall Rating 100% Ba Baa Ba
From the tables above it can be noted that Krakatau Steel is positioned at the lowest rank
(even below domestic steel manufacturers).

Rank Name of the company Country Score

1 POSCO South Korea 4.3
2 Arcelor Mittal Luxembourg 3.45
3 Jaya Pari Steel Indonesia 3.3
4 Gunawan Dianjaya Steel Indonesia 2.8
5 U.S. Steel USA 2.75
6 Krakatau Steel Indonesia 2.3

POSCO from South Korea ranks no.1 in Moody’s steel assessment.

In size and business profile factor, Krakatau Steel is well ahead of domestic steel
manufacturers and it is the only one to cross USD $ billion in sales.

Krakatau Steel languishes at the sixth position mainly because of debt & free cash flow. It
has a large amount of debt. Overall, the financial policies and financial strength need to
improve to make Krakatau Steel globally more competitive.
III. Conclusion
1. Krakatau Steel is the leader in the domestic Indonesian market but the size of a
company does not reflect its financial performance.
2. Many tools/methods have been used in this financial performance evaluation, the
result of which being that Krakatau Steel is not superior to other domestic steel
manufacturers.
3. In hindsight, the IPO price of Rp 850/share seems appropriate for Krakatau Steel.
The local community deemed it to be too low for a company of this stature but it has
to be taken into consideration that stock prices are not influenced by sentiment.
4. Potential investors should not be discouraged by the negative cash outflows as
Krakatau Steel is using this money to finance new projects and expansion.
5. It is safe to say that POSCO is the company that has set good standards for financial
performance and Krakatau Steel will surely benefit from the joint venture with its
South Korean counterpart.

IV. RECOMENDATION

Looking at the results of Moody's global steel assessment for global steel companies, we
recommend that PT Karakatau Steel must work with Posco as Posco has the best performance
on this field. If PT Karakatau Steel can cooperate with Posco company PT Karakatau Steel
company can improve their management by benchmarking with Posco.