on Coal & Petrosea

Coals to me are the junk foods.
We know they are not good for health, but we consume them anyway.
Either out of convenient, arguably cheap and tasty (coal for power plant).

In 2013, according to EIA, 41% electricity generated in the world came from coals.
Although more Countries are switching to Natural Gas which is likely the lesser evil.

For Indonesia, however, the case for using coals are, IMO, rather strong, as follows:
1. The Country is playing catch up in building up power generators (after being neglected for years if not decades), hence the 35,000 MW target of President Jokowi.
If you look at the tender list, the majority of the new power plants are PLTU, which of course will be using coals.
2. Coals are abundance in Indonesia and so far, arguably the cheapest option.
3. The mining infrastructures for coals are more developed than other energy sources. Hence the more consistent and stable supplies, especially critical for power plants.

Coal price had been down almost half from the peak in 2011-2012.
However, it had been up recently by more than half.
The reason for the hike is likely to be the biggest supplier (China, produced 46% of all coal in 2015), cutting down supply and not due to demands picking up.

To me, the switch to healthier food (renewable energies) is a good news.
Cutting down the coal production and make it more sustainable will be, by and large, better for future generation.
I think coal demand will or should be reduced over the years, especially with the awareness of global warming and the initiative to switch to renewable.

But then, why am I investing in Petrosea (PTRO)??
The case for investment in Petrosea is a hard one, it mainly due to below:
1. It is a hedge.
Human is irrational and for short term convenient sake, who cares about future generation? I do not share that view and definitely sad if we are stepping backward to again heavily relying on coals.
Hence, this will serve as a hedge on human stupidity.

2. Petrosea’s track records of safety in mining.
If the junk foods are bad, at least I must choose a good producer.
Let’s say, I’d rather invest in McDonalds, because their systems are efficient and they create productive jobs and decent system/environment for people to work.

So in this case, Petrosea creates a safe environment for their workers.
This can be seen from the long safety record that they have over the years.

3. Petrosea is not only Coal Mining.
There are 3 main business units in Petrosea:
* Coal Mining & Coal JV in Santan Batubara.
* Offshore Oil supply & logistic (POSB)
* Engineering & Project Management (EPM)

Coal mining & POSB occupied at least 80% of the top line, while EPM less than 20%.
With the downturn in coal & oil prices, Coal mining & POSB are both in red in 2016H1.
Whereas EPM is turning (finally) some decent profits.

So basically EPM is the only profitable business unit at the moment.

My argument is that they just have to downsize the Coal Mining and POSB units and make them economically sustainable.

While focusing more on good EPM projects and turn in profit from this unit.
At the price of Rp520 during this analysis, they just need to churn out US$5Million profit to give the shareholders Rp60 EPS, that is the earning yield of over 10%.

From earning point of view, the expectation is pretty low.

How about Balance Sheet?
Petrosea does have substantial amounts of Debts, which were used to buy mining equipment, so those are likely to be covered by Coal Mining unit.
As long as the Coal Mining unit can sustain economically the debts should eventually be paid with the cashflow generated.
Note that the cashflow was actually positive after adding back the depreciation.

The gross cash per share held by the company is more than Rp840.
Note: Gross Cash and NOT Net Cash (meaning not net of Debts yet).
Why use Gross Cash? because the thesis is that the debts should be sustained by Coal Mining unit.

To sum it up

1. Petrosea just have to earn US$ 5Million profit to provide satisfactory return to me.
2. Positive Cashflow are used to payoff Debts.
3. Santan Batubara JV will be a bonus, which I argue should be sold if the price is right.
4. The PLB (Pusat Logistik Berikat) by POSB will be another wildcard.
   In one hand, it should be beneficial, but in another, it could tie up the Capital.

Petrosea occupied about 10-15% of my total portfolio.
With the recent divestment of my core holding (CTRP), it should now about 15-20% of my total shares.

Fall.Cushion_