KRAKATAU STEEL B

FINANCIAL MANAGEMENT MM 5009

Syndicate 7:

Langgeng Setyono (29116009)

Heda Kalenia (2916056)
Surya Nugroho (29116005)
Mardian Widyastuti (29116130)

MASTER OF BUSINESS ADMINISTRATION

INSTITUT TEKNOLOGI BANDUNG

2017
 PROBLEM SOLVING FOR KRAKATU STEEL B

A. Objective
Krakatau Steel is a biggest steel company in Indonesia. Many Indonesian people presume that
Krakatau Steel is one of valuable assets for Indonesia. Become local company is not enough,
Krakatau Steel have to go global. Therefore, Anto as a Financial analyst in Krakatau Steel want
to know the position and the opportunity to compete in the global market. This assessment
will also be used as a mean to find an appropriate company as a benchmark.
Anto use several company from different region as a comparison, such as
Arcelor Mittal from Luxemburg, Posco from South Korea, U.S Steel from U.S,
PT Gunawan Dianjaya Stell and PT Jaya Pari Steel.
B. Analysis
To Analysis the position of Krakatau Steel position and opportunity in global
market. We will compare the position of Krakatau Steel with other competitor
as mention above, two local company and three global company from
different region. The measurement by Moodys assessment. Financial
statement of 2008, 2009, and 2010 are used. Some of the ratios in Moddys
Global Steel measurement are using data of three years while other ratios
only use the data of 2010. Below are the key rating factors including the
weight score of each category:

Below are formulas for calcutating Broad Rating Factor according to Moodys :
1. Size and Business Profiled
 Net Consolidated Sales ($USD billion) number is derived from the last
revenue data.
Operational Diversity, Regional Diversity, Import Threat/Export Reliant
value are available in exhibit 2.
2. Operating Performance and Volatility
Average EBIT
EBIT Margin = Average Revenu e
Average EBIT
Return on Average Tangible Assets = Average AssetsAverage Other Assets
Volatility based on the Coefficient of Variation CFO/Net sales =
CFO 2008 CFO 2008 CFO 2008
Stdev ( ; ; )
Revenue 2008 Revenue 2008 Revenue 2008
CFO 2008 CFO 2008 CFO 2008
Average( ; ; )
Revenue 2008 Revenue 2008 Revenue 2008
3. Financial Policies
Latest Debt
Debt/Capital = Latest Assets
Average Debt
Debt/EBITDA = Average EBIT + Average Depreciation

4. Financial Strength
Average EBIT
EBIT/Interest = Average Interest Expanse
Average CFO
CFO-div/Debt = Average Debt
Average Free Cash Flow
FCF/Debt = Average Debt
 Rating Factors/Sub factors Weighting
Gunawan
Broad Rating Rating Krakatau Steel Jaya Pari Steel Posc
Dianjaya
Categories
Ratin Ratin Ratin
Factor Sub-factor Value Value Value Value
g g g
1. Net Consolidated Sales
1.74 B 0.20 Caa 0,05 Caa 53,43
(USD Billion)
Size and
1 Business 2. Operational Diversity
Profile 3. Regional Diversity 5 A 3 Baa 2 Ba 7
4. Import Threat/Export
Reliant
10.65 11.93
1. Ebit Margin (3 Years) 6.2 % Ba 9.70 % Baa Baa
% %
2. Return on Average
2 Operating 15.01 13.38
Tangible Assets (3 years 7.22 % Baa Aa A 12.11%
Performance % %
average)
and Volatility
3. Volatility based on the
Coefficient of Variation of 32% A 917% Caa 119% Caa 87%
CFO/Net Sales
27.03
1. Debt/Capital 47.15% Baa 39.91% Baa Aa 41.09%
3 Financial %
Policies 2. Debt/EBITDA ( 3 years
5.85 Caa 4.03 Baa 2.04 Baa 2.94
average
1. Ebit/Interest (3 years) 3.01 Ba 5.04 Baa 64.76 Aaa 11.12
4 2. CFO-Div/Debt (3 years 54.28
Financial 9.28 % Caa 4.45% Caa Aa 19.88%
Average) %
Strength
3. FCF/Debt (3 years 56.04
-4,95% Caa 11.61% Baa Aaa 13.45%
average) %
After that we substitute rating appropriately with its own value, like
the table below:

After we know the rating of value, we compute the weighted sub-

factor with its own weight and also compute total score each of steel
company, the results is shown below:

Broad Rating Rating Gunawan

Categorie Krakatau Steel Dianjaya Steel Jaya Pari Steel Posc
s Ratin Ratin Ratin R
Factor Sub-factor
Value g Value g Value g Value g
1. Net Consolidated
1 0.25 0 0.00 0.00 0.00 6
Sales (USD Billion)

Size and 2. Operational Diversity

1
Business Profile 3. Regional Diversity
4 0.40 3 0.30 2 0.20 5
4. Import Threat/Export
Reliant
 1. Ebit Margin (3 Years) 2 0.20 3 0.30 3 0.30 3
2. Return on Average
Operating Tangible Assets (3 years 3 0.15 5 0.25 4 0.20 4
2 Performance average)
and Volatility
3. Volatility based on the
Coefficient of Variation 4 0.40 0 0.00 0 0.00 1
of CFO/Net Sales

1. Debt/Capital 3 0.45 3 0.45 5 0.75 3

Financial
3 2. Debt/EBITDA ( 3
Policies 0 0.00 3 0.30 3 0.30 3
years average
1. Ebit/Interest (3 years) 2 0.10 1 0.05 6 0.30 5

Financial 2. CFO-Div/Debt (3
4 0 0.00 0 0.00 5 0.25 2
Strength years Average)
3. FCF/Debt (3 years
0 0.00 3 0.15 6 0.30 3
average)
Total 1.95 1.80 2.60 3.82
Rating Ba2 Ba3 Baa3 A2
1. Size and Business Profile
Size and business profile of Krakatau Steel is weak especially in Net
Consolidated Sales (USD Billion) than the international competitor.
But in the local position Krakatau Steel place first position. Krakatau
Steel get point B in net Consolidated sale. Than the international
competitor Posco, Arcelor Mittal, Us Steel get high score Aa. In
Operational Diversity, Regional Diversity, Import Threat/Export
Reliant good performance that get high score than the other
competitor Krakatau Steel get A.
2. Operating Performance and Volatility
For Earning before income and tax of Krakatau steel is normal Ba it means still good
and closer to A point. In Return on Average Tangible Assets (3 years average) get Baa
it is lower than the local competitor that get A in this point. Then, in Volatility based
on the Coefficient of Variation of CFO/Net Sales is good performance rather than
other company that get lower than A point except Arcelor Mittal that get same score.
3. Financial Policy
In financial policy there two sub factors that measured are Debt/Capital and
Debt/EBITDA. In the debt/capital Krakatau steel in good position which get point
Baa but this point lower than Jaya Pari Steel that get A. for the Debt/EBITDA is bad
because get sore Caa than other competitor higher than Caa except Arcerol Mitral and
U.S Steel.
4. Financial Strength
In Financial strength Krakatau steel still good in the EBIT/Interest rather than CFO-
Div/Debt and FCF/Debt. In EBIT/interest Krakatau Steel get Ba point while CFO-
Div/Debt and FCF/Debt got score Caa means very weak.

C. Conclusion and Recommendation

1. Conclusion
In overall position Krakatau Steel in the middle position compare
by international competitor and local competitor. In local
competition Krakatau Steel has high rank than Gunawan
Dianjaya Steel and Jaya Pari Steel. Krakatau Steel get rating Ba2
and the local competitor below this rating. While in the international competition
below Posco and U.S Steel and same rating with Arcerol Mittal
2. Recommendation
To increasing performance and rating of Krakatau Steel this company should
increasing the sub factor that weak performance. Three lowest sub factors are
Debt/EBITDA, Ebit/Interest, CFO-Div/Debt and FCF/Debt.
In term of Debt/EBITDA Krakatau steel should decreasing average Debt or
Increasing average EBIT and average depreciation term of CFO Krakatau Steel
should increase the average of CFO or decrease the average of debt in the future.
In term of FCF should increasing average free cash flow or reducing the average
debt.