Equity Valuation January 5, 2015

KMI Wire and Cable, Tbk

Target Price Low 180

Secondary Report

High 230 Cable

Stock Performance

More Capacity to Grow

Source: Bloomberg, PEFINDO Equity & Index Valuation Division

Stock Information

IDR

Ticker code

KBLI

Market price as of January 2, 2015

145

Market price – 52 week high

179

Market price – 52 week low

124

Market cap – 52 week high (bn)

717

Market cap – 52 week low (bn)

497

Market Value Added and Market Risk

Source: Bloomberg, PEFINDO Equity & Index Valuation Division

Stock Valuation High

Last 253

Current 230

Low

199

180

Shareholders Javas Premier Venture Capital Limited

(%) 49.68

BP2S SG S/A BNP Paribas Singapore Branch

8.69

Lion Trust (SG) Ltd S/A Fairfield Intl

15.36

Public (each below 5% ownership)

26.27

Contact: Equity & Index Valuation Division Phone: (6221) 7278 2380 [email protected]

PT KMI Wire and Cable Tbk (KBLI) manufactures cable, particularly copper and aluminum based cable. Its product portfolio comprises of more than 2,000 types and sizes of cable, including low and medium voltage power cable, and control cable. It uses the brand Kabelmetal for its products. KBLI also makes aluminum conductor with composite core (ACCC) cable, which is now one of its flagship products. Its production facilities are located in Cakung, East Jakarta in a 10-hectare (ha) area. Production facility development for high voltage cable is now under way, and is estimated to finish in October 2015. Next year, KBLI will have an additional production capacity of 5,000 metric tons (MT) per year for copper cable, particularly building wire, and another 2,000 MT for stranded aluminum cable. In 2016, it will expand its copper cable production capacity to 4,000 MT per year to manufacture high voltage cable (150 kV).

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KMI Wire and Cable, Tbk INVESTMENT PARAMETERS Target price adjustment We have made several adjustments to our previous forecast and adjusted our target price to IDR180–IDR230 per share, based on the following considerations: 











Weakening revenue. Due to the legislative and presidential elections in 2014 many projects were delayed, and cable sales were sluggish. As a result KBLI’s revenue in 2014 is estimated to slow by 14% year-on-year (YoY). Aluminum cable revenue declined significantly by more than 40% YoY in 9M2014, while copper cable was down 8% YoY. Increase production capacity. In 2015, it will have additional production capacity of 5,000 mt per year for copper cable, and another 2,000 mt for stranded aluminum cable. It will further increase by 4,000 mt per year for high voltage copper cable (150 kv), and this will boost KBLI’s competitiveness. Revenue to rebound. Considering the government’s commitment to intensifying infrastructure development and increasing private sector development in the property sector, we expect sales will rebound and even exceed 2013 revenue, reaching IDR2.63 trillion (18% growth YoY). Rising aluminum prices. Due to increasing raw material cost, KBLI’s COGS margin increased to 90.7% in 9M2014 compared to only 88.4% in 9M2013. Rising aluminum prices is the main reason, while copper prices continued to decline. The copper price up to mid December 2014 fell 14% year-to-date (YtD), while aluminum rose 6%. Selling expenses efficiency. KBLI benefited from selling expenses efficiency and declining foreign exchange (forex) losses, despite salaries and interest costs burdening profitability. Accordingly, its bottom line fell only 22% YoY vs. 32% YoY for gross profit, in 9M2014. Selling expenses efficiency came from declining transportation costs and handling fees, while interest costs rose with the higher debt needed to support expansion. Its risk-free rate, equity premium, and beta assumption are 7.9%, 3.1% and 1.1x, respectively.

Business prospects In 2014, aside from the elections, fiscal and monetary tightening policy caused shrinking economic growth. However, we remain confident in Indonesia’s economic prospects. After the fuel price hike, it is expected the government will have better fiscal funds to transfer to infrastructure development. The increasing middle and affluent class population and the large productive population will be a cushion for the economy. Power cable demand will also stay strong and is expected to increase in line with the government’s commitment to intensify infrastructure development and increase private sector development. We therefore maintain our optimism of KBLI’s prospects, moreover it will realizing additional production capacity within the next two years. Table 1: Performance Summary Revenue (IDR bn) Pre-tax profit (IDR bn) Net profit (IDR bn) EPS (IDR) EPS growth (%) P/E (x) PBV (x)

2011

2012

2013

2014P

2015P

1,842 94 64 15.9 0.3 6.4 0.6

2,273 173 125 31.2 1.0 6.1 0.9

2,572 105 74 18.3 (0.4) 7.2 0.6

2,221 85 61 15.3 (0.2) 9.5* 0.6*

2,626 137 99 24.6 0.6 5.9* 0.6*

Source: PT KMI Wire and Cable Tbk (2011-2013), Pefindo Equity & Index Valuation Division Estimates (2014P-2015P) Notes: * based on Share Price as of January 2, 2015 – IDR145/share

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January 5, 2015

Page 2 of 9

KMI Wire and Cable, Tbk BUSINESS INFORMATION Mega power plant project The government plans to develop a mega power plant with a 35,000 megawatts (MW) capacity, and it is estimated this will boost cable demand, as this year cable demand weakened in line with project delays both for government and private projects, due to the elections. Industry players expect the project will prioritize domestic cable rather than imported cable from the investors’ home countries. When ensuring the project runs according to its planned time line, land acquisition is a significant issue. We believe the new government is committed to easing land acquisition bottlenecks for infrastructure projects. Formidable challenges remain Next year, Indonesia’s economy will face formidable challenges, including a stronger USD and a Fed rate hike. This could see the rupiah depreciate deeper against the USD, while foreign-denominated debt grows significantly both in the private sector and government. Lower oil prices could benefit Indonesia by decreasing its current account deficit in line with the falling oil import value. Indonesia is also vulnerable to capital outflows due to its current account and trade deficits. Nonetheless, after the fuel price hike, it is expected the government will have increased fiscal funds to transfer to infrastructure development. The government’s focus on developing important sectors such as energy, maritime, fishery, and infrastructure, is a benefit for economic growth. The increasing middle and affluent class population and the large productive population will also be a cushion for the economy. Figure 1: GDP Growth (%)

Source: www.tradingeconomics.com, PEFINDO Equity & Index Valuation Division

Larger production capacity KBLI plans to add to its production capacity in 2014 have shifted to 2015. Therefore, in 2015 it will have additional production capacity of 5,000 mt per year for copper cable, particularly building wire, and 2,000 mt for stranded aluminum cable. For 2016, KBLI will expand again its copper cable production capacity by as much as 4,000 mt per year for high voltage cable (150 kV). Production facility development for high voltage cable is now under way and estimated to finish in October 2015. All the necessary machinery for completion will arrive at the production facility by the end of 1Q2015, with some already there. Investment for high voltage cable machinery is estimated to reach USD9.4 million. KBLI expects to start commercial production of high voltage cable in early 2016. This will boost its competitiveness as there are only two companies that can produce high voltage cable. Table 2: Production Capacity Plan

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January 5, 2015

Copper cable (MT) Aluminum cable (MT) Total capacity (MT)

2014

2015P

2016P

21,000 12,000 33,000

26,000 14,000 40,000

30,000 14,000 44,000

Source: PT KMI Wire and Cable Tbk, PEFINDO Equity & Index Valuation Division

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KMI Wire and Cable, Tbk FINANCE Next year, revenue to rise Revenue in 2014 was not as high as 2013. Sales were sluggish due to the elections and many projects were delayed. KBLI’s 2014 revenue is estimated to fall by 14% YoY, booking only IDR2.22 trillion compared to IDR2.57 in 2013. Aluminum cable revenue declined significantly by more than 40% YoY from 9M2014, while copper cable was down 8% YoY. With increasing production capacity for copper (5,000 MT/year) and aluminum (2,000 MT/year) cable as well as a better business activities, we estimate sales will likely rebound in 2015 and even exceed 2013’s revenue, reaching IDR2.63 trillion (growth of 18% YoY). The government’s commitment to intensifying infrastructure development and increasing private sector development in the property sector will boost demand for cable. Figure 2: Revenue

Source: PT KMI Wire and Cable Tbk, PEFINDO Equity & Index Valuation Division

Efficiency helps bottom line Due to increasing raw material cost, KBLI’s COGS margin increased to 90.7% in 9M2014 compared to only 88.4% in 9M2013. Rising aluminum prices is the main reason, while copper prices continued to decline. The copper price up to mid December 2014 fell 14% YtD, while aluminum rose 6%. However, KBLI’s bottom shrank less than gross profit, 22% YoY vs. 32% YoY. It benefited from selling expenses efficiency and declining forex losses, despite salaries and interest costs burdening profitability. Selling expenses efficiency, particularly from transportation costs and handling fees, fell 20% YoY and 73% YoY, respectively. Meanwhile, increasing interest costs came with higher debt needed to support expansion. Figure 3: Raw Material Prices

Source: PT KMI Wire and Cable Tbk, PEFINDO Equity & Index Valuation Division

Figure 4: Profit Margins

Source: PT KMI Wire and Cable Tbk, PEFINDO Equity & Index Valuation Division

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January 5, 2015

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KMI Wire and Cable, Tbk INDUSTRY COMPARISON

Table 3: KBLI and its Peers Performances as of September 2014 Revenue [IDR bn] Gross profit [IDR bn] Pre-tax profit [IDR bn] Net profit [IDR bn] Total assets [IDR bn] Total liabilities [IDR bn] Total equity [IDR bn] Growth [%, YoY] Sales

KBLI

VOKS

KBLM

JECC

SCCO

1,640

1,539

661

1,112

2,397

153 64

76 (65)

51 17

129 52

217 115

45 1,402

(53) 1,776

13 613

36 1,048

89 1,749

486

1,227

330

864

983

916

549

282

184

766 (1.9)

(15.2)

(14.1)

(10.8)

13.8

Gross profit

(31.9)

(62.3)

(28.1)

9.0

(5.6)

Pre-tax profit

(22.3) (22.1)

N.A. N.A.

41.1 45.0

89.7 73.5

(15.1) (7.1)

Net profit Profitability [%] Gross margin

9.3

5.0

7.8

11.6

9.1

Pre-tax margin Net margin

3.9

(4.2)

2.6

4.7

4.8

2.8

(3.4)

1.9

3.2

3.7

ROA ROE

3.2

(3.0)

2.1

3.4

5.1

4.9

(9.6)

4.5

19.6

11.6

0.53

2.24

1.17

4.71

1.28

Leverage Liabilities to equity [%]

Source: IDX, PEFINDO Equity & Index Valuation Division

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January 5, 2015

Page 5 of 9

KMI Wire and Cable, Tbk TARGET PRICE VALUATION 

Methodology We applied the discounted cash flow (DCF) method as the main valuation approach, considering that income growth is a value driver for KBLI rather than asset growth. Furthermore, we also applied the guideline company method (GCM) as a comparison method. This valuation is based on 100% of KBLI’s share price as of January 2, 2015, using its financial report as of September 30, 2014 for our fundamental analysis.

 Value estimation We used a cost of capital of 10.5% and a cost of equity of 11.4% based on the following assumptions: Table 4: Assumptions Risk free rate [%]* Risk premium [%]* Beta [x]** Cost of equity [%] Marginal tax rate [%] WACC [%]

7.9 3.1 1.1 11.4 25.0 10.5

Source: Bloomberg, PEFINDO Equity & Index Valuation Division estimates * as of January 2, 2015 ** PEFINDO Beta Saham, as of December 29, 2014

The target price for 12 months based on our valuation as of January 2, 2015 is as follows:  

Using the DCF method with a discount rate assumption of 10.5%, it is IDR195-IDR218 per share. Using the GCM method (PBV 1.1x and P/E 9.6x), it is IDR147–IDR257 per share.

In order to obtain a value, which represents both value indications, we have weighted both DCF and GCM methods by 70%:30%. Based on the above calculation, the target price of KBLI for 12 months is IDR180–IDR230 per share. Table 5: Summary of DCF Method Valuation Conservative

Moderate

Aggressive

48 832 38 (137) 780 4,007 195

50 875 38 (137) 826 4,007 206

53 919 38 (137) 872 4,007 218

PV of free cash flow [IDR bn] PV terminal value [IDR bn] Non-Operating Assets- [IDR bn] Debt [IDR bn] Total equity value [IDR bn] Number of shares [mn shares] Fair value per share [IDR] Source: PEFINDO Equity & Index Valuation Division estimates

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January 5, 2015

Page 6 of 9

KMI Wire and Cable, Tbk Table 6: GCM Comparison KBLI

VOKS

KBLM

JECC

SCCO

Average

P/E, [x]

9.2

N.A.

14.5

6.6

8.3

9.6

P/BV, [x]

0.6

1.2

0.6

1.9

1.1

1.1

Source: Bloomberg, PEFINDO Equity & Index Valuation Division estimates

Table 7: Summary of GCM Valuation P/E P/BV

Multiples (x)

Est. EPS (IDR)

9.6 1.1

15 -

Est. BV/Share (IDR)

Value (IDR)

237

147 257

Source: Bloomberg, PEFINDO Equity & Index Valuation Division estimates

Table 8: Fair Value Reconciliation Fair Value per Share [IDR] DCF

GCM

Average

Upper limit

218

257

230

Bottom limit

195 70%

147 30%

180

Weight

Source: PEFINDO Equity & Index Valuation Division estimates

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January 5, 2015

Page 7 of 9

KMI Wire and Cable, Tbk

Table 9: Consolidated Statements of Comprehensive Income 2011

2012

2013

2014P

Sales

(in IDR bn)

1,842

2,273

2,572

2,221

2,626

COGS

(1,673)

(1,997)

(2,296)

(2,016)

(2,349)

2015P

Gross profit

169

277

277

206

277

Operating expense

(72)

(90)

(101)

(91)

(109)

Operating profit

97

187

176

114

168

Other income (charges)

(3)

(14)

(71)

(29)

(31)

Pre-tax profit Tax Net profit

Figure 5: Historical P/E and P/BV

94

173

105

85

137

(30)

(47)

(32)

(24)

(38)

64

125

74

61

99

Source: PT KMI Wire and Cable Tbk (2011-2013), Pefindo Equity & Index Valuation Division estimates (2014P-2015P)

Table 10: Consolidated Statements of Financial Position (in IDR bn)

2011

2012

2013

2014P

Source: PT KMI Wire and cable Tbk., Pefindo Equity & Index Valuation Division

2015P

Figure 6: Historical ROA, ROE and TAT

Assets Cash and cash equivalents

107

68

60

38

37

Receivables

265

337

487

516

615

Inventory

225

300

298

320

384

75

45

72

121

167

Total current assets

673

751

917

995

1,202

Fixed assets

388

391

393

420

541

Other assets

22

20

27

32

44

1,084

1,162

1,337

1,447

1,787

161

170

144

167

227

-

-

111

118

109

Other short-term payables

147

75

104

108

142

Total current liabilities

308

245

360

393

478

56

72

90

105

142

-

-

-

-

-

Other assets

Total assets

Liabilities and equity Trade payables Short-term payables

Long-term payables Other long-term payables Total liabilities Total equity

56

72

90

105

142

720

845

887

948

1,165

Source: PT KMI Wire and Cable Tbk (2011-2013), Pefindo Equity & Index Valuation Division estimates (2014P-2015P) .

Source: PT KMI Wire and Cable Tbk., Pefindo Equity & Index Valuation Division

Table 11: Key Ratio Ratio

2011

2012

2013

2014P

2015P

Sales

50.0

Operating profit

50.4

23.4

13.2

(13.6)

18.2

92.4

(5.9)

(35.0)

EBITDA

15.1

42.9

73.8

(38.8)

(15.1)

Net Profit

15.2

31.7

96.5

(41.3)

(16.9)

20.5

9.2

12.2

10.8

9.3

10.5

5.3

8.2

6.8

5.1

6.3

EBITDA margin

6.1

8.6

4.7

4.6

6.0

Net margin

3.5

5.5

2.9

2.8

3.9

ROA

5.9

10.8

5.5

4.2

5.5

ROE

8.8

14.8

8.3

6.4

8.5

Debt to equity

0.5

0.4

0.5

0.5

0.5

Debt to asset

0.3

0.3

0.3

0.3

0.3

Current ratio

2.2

3.1

2.6

2.5

2.5

Quick ratio

1.4

1.7

1.6

1.5

1.4

Growth (%)

Profitability (%) Gross margin Operating margin

Solvability (X)

Liquidity (X)

Source: PT KMI Wire and Cable Tbk (2011-2013), Pefindo Equity & Index Valuation Division estimates (2014P-2015P)

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January 5, 2015

Page 8 of 9

KMI Wire and Cable, Tbk DISCLAIMER This report was prepared based on trusted and reliable sources. Nevertheless, we do not guarantee its completeness, accuracy and adequacy. Therefore, we are not responsible for any investment decisions made based on this report. All assumptions, opinions and predictions were solely our internal judgments as of the reporting date, and those judgments are subject to change without further notice. We are not responsible for any mistakes or negligence that occurs by using this report. Recent performance cannot always be used as a reference for future outcome. This report does not offer a recommendation to purchase or hold particular shares. This report might not be suitable for some investors. All opinions in this report have been presented fairly as of the issuing date with good intentions; however, they could change at any time without further notice. The price, value or income of each share of the Company stated in this report might be lower than investor expectations, and investors may obtain returns lower than the invested amount. Investment is defined as the probable income that will be received in the future; nonetheless such returns may fluctuate. As for companies whose shares are denomi nated in a currency other than rupiah, foreign exchange fluctuations may reduce their share value, price or the returns for investors. This report does not contain any information for tax considerations in investment decision -making. The share price target in this report is a fundamental value, not a fair market value or a transaction price reference required by regulations. The share price target issued by the PEFINDO Equity & Index Valuation Division is not a recommendation to buy, sell or hold particular shares. It shou ld not be considered as investment advice from the PEFINDO Equity & Index Valuation Division and its scope of service to some parties, including listed companies, financial advisors, brokers, investment banks, financial institutions and intermediaries, does not correlate with receiving rewards or any other benefits from such parties. This report is not intended for any particular investor and cannot be used as part of an objective investment analysis of particular shares, an investment recommendation, or a n investment strategy. We strongly recommend investors to consider the suitability of the situation and conditions before making a decision in relation with the figures in this report. If necessary, consult with your financial advisor. PEFINDO keeps the activities of the Equity Valuation Division separate from its Ratings Division to preserve the independence and objectivity of its analytical processes and products. PEFINDO has established policies and procedures to maintain the confidentiality of non -public information received in connection with each analytical process. The entire process, methodology and the database used in the preparation of the Reference Share Price Target Report as a whole are different from the processes, methodologies and databases used by PEFINDO in issuing ratings. This report was prepared and composed by the PEFINDO Equity & Index Valuation Division with the objective of enhancing the transparency of share prices of listed companies in the Indonesia Stock Exchange (IDX). This report is also free of influence from any other party, including pressure or force either from the IDX or the listed company reviewed. PEFINDO Equity & Index Valuation Division earns a reward amounting to IDR20 million from the IDX and the reviewed company for issuing this report twice a year. For further information, please visit our website at http://www.pefindo.com This report was prepared and composed by the PEFINDO Equity & Index Valuation Division. In Indonesia, this report is published in our website and in the IDX website.

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January 5, 2015

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