Release date: 30 October 2018

AKR-BP new gas stations could contribute 24.3% of total sales volume, or nearly 1,000kl, by 2025. Blended petroleum margin would also improve to 8% from 6% currently, mainly on higher contribution from gasoline. Our sensitivity analysis shows that for every 5% drop in distribution margin, earnings could decline around 6%. Maintain BUY and target price of Rp4,730, implying 19.2x 2019F PE, slightly below -1SD of its 5-year mean.

  • Exponential sales volume growth from new AKR-BP gas stations. AKR Corporindo (AKRA) aims to open 350 AKR-BP gas stations within the next 10 years. If AKRA manages to operate 30 new gas stations each year with potential daily sales volume of 15,000l, sales volume contribution from AKR-BP could reach nearly 1,000kl by 2025, or 24.3% of AKRA’s total sales volume. This will continue to guarantee AKRA’s position as the largest private petroleum distributor in the country with a market share of 4.1% by 2025, up from 2.8% in 2017.
  • Expect better margins ahead despite the recent cap by government. The government recently capped retail petroleum margin at 10% to control prices of nonsubsidised fuels and to tame inflation in the current relatively high crude oil price environment. This regulation impacts mainly unsubsidised higher-octane gasoline which is what AKR-BP is targeting at. However, we view AKRA’s petroleum distribution margin will continue to improve as the imposed ceiling is still relatively higher than AKRA’s current margin of around 7% (at Rp600-630/l). Our model shows that gross margin from the distribution segment could grow from 6% this year to more than 8% by 2025, assuming conservative long-term margins of Rp700/l for diesel and 10% for gasoline.
  • Two scenarios on Freeport’s smelter deal. We estimate an outright land acquisition could add Rp285b-465b to AKRA’s net profit, assuming 100ha of land sales with ASP at Rp1.8m-2.2m/sqm. Meanwhile, potential proceeds from long-term land lease, assuming at US$7.50/sqm per year (or implying 5% yield from current land ASP), could reach Rp68b pa.. Both scenarios bode well for AKRA’s JIIPE project, in our view, as Freeport would help to lure additional demand for JIIPE’s land from its value chain.
  • Sensitivity analysis of margins. Should distribution margin decline 5% to Rp570-600/l for fuel, we estimate core profit in 2019 to decline 6.1% from our base case to Rp927b. Gross margin will also decline 30bp from our base case to 8.0% in 2019.

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