Profits Dropped by 87% and Expensive, Investing in ESSA is High Risk!

• The net profit of PT Surya Esa Perkasa Tbk (ESSA) decreased by 87% in the first quarter of 2023 as shown from the top line or revenue which also decreased by 42%.
• The drop in revenue was due to the drop in ammonia prices and the disruption of the plant’s operations which had been closed for three weeks.
• The company’s suppliers are concentrated in two major retailers and 93% of customers are partners.

Jakarta, CNBC Indonesia – PT Surya Esa Perkasa Tbk (ESSA) posted a decrease in net profit of 87%, to IDR 47 billion for the year. (year-year/yoy). This net profit is the lowest in the last 7 quarters.

The decline in ESSA’s net benefits was seen from the side the top line the company which is also the lowest since the second quarter of 2021. The revenue of the first quarter of ESSA 2023 decreased by 54% to IDR 1.3 trillion.

A decrease in revenue indicates a decrease in sales volume or average sales price (Average Selling Price/ASP) of the product. According to the formula for calculating revenue, that is sales volume x ASP.

According to financial statements, the decrease in income was due to the share of ammonia sales which decreased by 48.8%, to Rp 1.3 trillion.

Launch Refinitive, Ammonia prices decreased by 54% from the highest level to $319 per ton. According to this, one of the reasons for the decline in income from ESSA was due to the decrease in the selling price of ammonia.

According to ChemicalSafetyFacts, Ammonia is a natural gas that acts as a chemical compound for various commercial products, such as fertilizers and cleaning agents. Ammonia can also be used as a refrigerant, neutralizer, purifier, plastic manufacturing, paint, and so on.

the company’s ammonia is sold to a related party, namely Genesis Corporation. This indicates that ESSA’s sales are based on one partner, so there is no diversification.

The lack of diversification is likely to cause the company to rely on one side, so that when customers run out of inventory, there is likely to be a lower price, because there is an agreement that all the ammonia will be absorbed by Genesis Corporation. Moreover, in financial statements It is also stated that the selling price is determined according to the agreement.

On the supply side, ESSA obtains raw materials from Pertamina EP and gas raw materials from the Joint Operating Company Pertamina Medco Tomori Sulawesi (JOBPMTS). The company’s concentrated distributors have the ability to cause the suspension of business operations, in the event of a supply disruption or contract termination.

Business

PT Surya Esa Perkasa Tbk was established on 24 March 2006 as a company. clean up natural gas in Palembang. The company’s business continues to grow by listing on the stock market (initial public offering/IPO) on February 1, 2012 at Rp 610 per share.

The company is conducting additional capital (HMETD) by issuing 100 million shares at an exercise price of IDR 3,000 per share. ESSA is expanding refineries Liquefied Petroleum Gas (LPG), adding 190 TPD.

The company’s production capacity increased by 50%, reaching 7,700 MT per month. ESSA received additional capital (HMETD) of IDR 495 billion to explore the ammonia business in 2018.

ESSA has again made a capital increase (PMTHMETD) of IDR 184 billion in 2020. In 2022 ESSA will distribute dividends for the first time.

Business Section

The company has three products which are LPG, Condensate and Ammonia.

LPG is used as fuel for kitchen appliances (gas stoves), motor fuel, and the construction industry metal garage for welding.

Condensate which is the result of gas distillation is used thinner, glue, car tires, and sealants polyethylene.

Most of the ammonia is used for fertilizers (~80% of the market), medicine, food and beverages, textiles, and so on.

Financial Performance

Ammonia is part of the company’s support and revenue contribution of up to 85%. However, this segment instead showed a decline in revenue followed by a decline gross profit margin.

This indicates that there is a decrease in the selling price. However, the company’s cost of goods sold, which tended to remain constant, caused GPM to decline. So, great benefits the ammonia fraction has dropped significantly.

Meanwhile, the LPG segments and processing services which accounted for only 15 percent of the company’s revenue were able to sustain ESSA’s business. This is because the LPG and processing services segments did not experience significant declines.

In fact, due to the decrease in the ammonia fraction, the LPG fraction can contribute to the total great benefits the company reached 38%.

Fertilizer Product Price Availability Expectations

Launch press release, The decrease in ESSA’s performance was due to lower commodity prices and lower sales volume due to the scheduled maintenance of the ammonia plant for 3 weeks.

In addition, ammonia prices weakened in the first quarter of 2023 in line with international commodity prices which also started to decline. On the other hand, the number of applications also decreased.

However, as China reopened after to be terminated in the usual manner Fertilizer demand began to recover. Higher gas prices in Europe will also be a positive sentiment given the increase in ammonia prices in the second half of 2023.

Appreciation

ESSA has an expensive valuation compared to its competitors SAMF (fertilizer sector) and TGKA (gas processing), especially on annualized PE ratios. This was due to a decrease in ESSA’s first quarter net profit.

In terms of efficiency and effectiveness, companies tend to be very good at efficiency and managing capital. However, this is partially biased due to industry differences due to ESSA being the only Ammonia company in Indonesia.

In terms of financial health, ESSA has a low debt-to-capital ratio and good short-term debt repayment capacity.

Is It Worth Investing?

The drop in ammonia prices was the main reason why ESSA’s performance experienced a significant drop. This was due to the closure of the factory for three weeks for maintenance.

ESSA also has a highly concentrated business from both supplier and customer sides. ESSA’s main raw material suppliers are just two companies and 93% of ESSA’s customers are participating partners.

Absence of diversification risks if a business partner terminates the contract, experiencing supply disruptions. In addition, the company also becomes flexible in determining the price due to the lack of choice, so that if the suppliers charge a high price, the company must accept the risk of unsold products.

Based on this, ESSA issuers are too risky to invest at this time.

CNBC INDONESIA RESEARCH

[email protected]

Disclaimer: This article is a journalistic product in the form of an opinion piece from CNBC Indonesia Research. This analysis is not intended to persuade readers to buy, hold or sell products or related investment sectors. The decision is entirely up to the reader, so we are not responsible for any loss or profit resulting from that decision.

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[Gambas:Video CNBC]