The first semester of this year was not a good period for the two of Sinar Mas Group’s paper companies, PT Indah Kiat Pulp and Paper Tbk. (INKP) and PT Tjiwi Kimia Tbk Paper Factory. Based on the financial statements for the first half of 2019, net profit attributable to the owners of the parent company INKP was only US $ 146.81 million, down 56.66% from US $ 340.5 million in the first half of 2018.
Tjiwi Kimia experienced a decline in net profit. Based on the financial statements for the first semester of 2019, net income attributable to the owners of the parent company TKIM was US $ 104.72 million. This achievement shrank 29.05% from the achievement of US $ 147.61 million in semester I / 2018.
On the stock market, INKP corrected 35.71% year-to-date to the level of Rp 7,425, while TKIM strengthened 4.05% ytd to the level of Rp 11,550 at the end of trading Thursday (1/8/2019).
Face Legal Issues
This situation also ignited questions from investors in the country. What on earth really happened? Indeed, the global paper and pulp market is less encouraging. However, having to lose profitability that much, of course there is a greater cause.
The investigation revealed that the Sinar Mas Group was facing legal issues at the international level, precisely in the largest country in the South American region, Brazil. Through a company that is a vehicle company in Brazil, CA Investment, a subsidiary of the Netherlands-based Sinar Mas Group, Paper Excellence (PE), filed a lawsuit against the owner of Eldorado do Cellulose. PE acquired the paper and pulp company several years ago.
PE filed a lawsuit against the Eldorado executive, who is a member of the Batista family, in a Singapore court. PE accuses them of deliberate actions, which are designed to mislead investors and endanger the company. The lawsuit is related to the plan to issue bonds worth US $ 500 million by the pulp mill in early February.
Eldorado finally cancelled the corporate action because it was banned from the courts of Brazil and Singapore. PE requests the suspension of all bid-related activities on the grounds that the prospectus contains inaccurate information and fails to disclose the company’s material facts.
Eldorado de Cellulose was bought by PE at a price of R $ 15 billion, transferring 100% of the shares. In its announcement to investors, the acquisition of Eldorado was said to be an important step because it successfully added eucalyptus production assets to its portfolio. No exception to wider market coverage.
When a problem arises in the process, it will certainly affect the parent company of PE, the Sinar Mas Group. The most obvious, the company has not been able to optimally utilize the existing market of Eldorado, especially to sell stock of paper and pulp that is increasingly mounting due to international prices that have not yet recovered.
As is known, currently Indonesian paper companies are incessantly looking for alternative markets in addition to countries that have been known as the main export destination of paper products. Call it China, Japan, Malaysia, India, the United States, South Korea and Bangladesh.
Is it true? There has been no confirmation from the relevant parties. To be sure, the sluggishness experienced by the company and of course the paper and pulp sector as a whole, has been confirmed by government data.
Export data realization of pulp and paper during January-May 2019 showed a decrease of 2.48% to US $ 2.75 billion compared to the same period last year of US $ 2.82 billion. Claimed decline occurred due to a decline in pulp prices on the global market.
Based on data from the Ministry of Environment and Forestry (LHK), the value of paper exports in the January-April 2019 period fell 2.05% to US $ 1.43 billion compared to the same period last year of US $ 1.46 billion. Meanwhile, pulp exports in the January-April 2019 period fell 0.71% to US $ 889.03 million compared to the same period last year of US $ 882.71 million.
Liana Bratasida, Executive Director of the Indonesian Pulp and Paper Association (APKI), said that the decline in the value of pulp and paper exports was due to fluctuations in pulp prices that followed price movements in the global market. “The pulp price in January-April 2018 is US $ 666.84 per ton, while in the same period this year the price of pulp is around US $ 579.37 per ton,” she said as quoted by Bisnis, Monday (1/7/2019).
She explained, the price of paper in the January-April 2019 period also decreased to US $ 824.27 per ton compared to the same period the previous year of US $ 894.43 per ton. Despite the decline in the value of pulp exports, Liana said, the volume of pulp exports in January-April 2019 increased by 12.5% compared to the same period last year.
Like the growth in the volume of pulp exports, in the January-April 2019 period, the volume of Indonesia’s paper exports increased by around 110,000 tons or 6.75% compared to the same period last year. “In the January-April 2019 period, Indonesia’s paper export volume increased by 1.74 million tons compared to the same period last year of 1.63 million tons,” Liana said.
She admitted that the increase in Indonesia’s pulp and paper export volume was caused by the growth in pulp and paper production each year. The pulp and paper industry also continues to increase production capacity. You can imagine if production capacity continues to increase, while the export market is increasingly competitive. The result was predictable, the price slid down.
As a global company, Sinar Mas certainly cannot allow the old owners of Eldorado to gnaw from within the company they have purchased. Issuance of bonds with no significant increase in sales is the same as lowering the valuation of the company itself. As a minority owner, naturally the profit sharing and return of capital to the Sinar Mas Group will be small, or even not at all. And this will obviously be very detrimental.
No wonder if the company was finally released their new market prospects in South America for a while, while resolving the problem of violating information to investors involving the old owner Eldorado in the Singapore court. If successful, it will certainly have a positive impact on the value of the company’s shares because of Eldorado’s valuation prospects that will not diminish. Plus there is an opportunity to get a greater market share in Latin America for the stockpile production of the Sinar Mas Group.