Adaro's Spin Off Corporate Action

The investors at Indonesian Stock Exchange (IDX) are currently paying a lot of attention to PT. Adaro Energy Indonesia Tbk (ADRO). Why? Because its stock price has increased for about 57% year to date to IDR 3,910/share. ADRO’s share price is even getting closer to its all time high price (ATH) back then at ~IDR 4,000/share in 2022 when there was coal booming.

The increase in ADRO share price of course mainly due to their plan to do a spin off corporate action to one of its subsidiaries, PT. Adaro Andalan Indonesia (AAI). The question is: What is spin off? What are the effects to ADRO’s fundamentals? Please keep reading this article to find the answer.

What is Spin Off?

According to wikipedia, spin off is a type of corporate action where a company "splits off" a section as a separate business or creates a second incarnation, even if the first is still active. It is distinct from a sell-off, where a company sells a section to another company or firm in exchange for cash or securities.?

From that definition, let us focus to these two terms:

1. Separate business
2. Splits off

In regards to the company spin off, the subsidiary company will then separate itself and form a new entity that is “free” from its parent company. In ADRO’s case, AAI will separate itself from ADRO’s structure. In other words, AAI later will do their business as usual without the need to wait for ADRO’s decision. Moving forward, AAI will also have its own board of directors, board of commissioners, and General Annual Meeting of Shareholders (RUPS). By separating itself from ADRO, of course the aim is to make AAI even bigger than today.?

Adaro’s Spin Off

Now, let us get to the main point of this article. What is actually the purpose of ADRO’s spin off? According to ADRO’s information disclosure to the shareholders, The Company is committed to fully supporting the Indonesian government’s commitment to reduce greenhouse gas emission, including the initiatives to achieve net-zero emissions in 2060 or earlier through various measures. The Company has a commitment to have around 50% of its total revenue generated by non thermal coal businesses by 2030.

Thus, based on the disclosure above, we can conclude that ADRO will focus itself in the green energy business or in a nutshell, they are planning to separate their thermal coal & green energy business. In order to focus on the green energy business, ADRO would need some access to various green financing. This AAI spin off would give ADRO some chances to get the access to some sources of financing, competitive financing costs, access to some environmental friendly projects, and give public investors an option to invest in a company that has a purpose in reducing carbon emission.

Anyway, currently ADRO has some green energy projects such as a water power plant with capacity around 1.4 GigaWatt in North Kalimantan/Borneo that will operate in 2030, and a solar power plant in Central Kalimantan/Borneo. If the water power plant project with 1.4 GigaWatt capacity is truly realized, it will become the largest in Indonesia.??

For your information, thermal coal is the coal that is used by electric steam power plants, and considered by many as “dirty energy”. Moreover, prior to the spin off, this is the business structure of ADRO:

If we look at the information above from the company’s public expose, ADRO has three business pillars:

1. Adaro Energy (ADRO) that focuses on thermal coal production
2. Adaro Minerals (ADMR) that focuses on metallurgical coal. Metallurgical coal is usually used for steel production
3. Adaro Green that focuses on green energy such as hydro, solar, and wind power plant

Once again, by separating the thermal coal business, ADRO is aiming to focus itself more on the green energy business.?

In correspondence to the information disclosure, AAI’s contribution towards ADRO’s performance is very significant. Firstly, AAI’s assets are contributing 52.9% to ADRO’s assets. Secondly, AAI’s net income is contributing 104.8% to ADRO’s net income. It means, if we exclude AAI performance from ADRO after the spin off (de-consolidation from financial statements), roughly speaking, ADRO will experience net loss in their income statement. Finally, on the revenue side, AAI is contributing 89.4% to ADRO’s revenue.?

Hence, the more interesting question is, how much is AAI price? Would it be cheap or expensive? Due to the disclosure again, the price of AAI will be around ~USD 2.45 billion. If we compare it to AAI’s net income in the first semester of 2024 which is USD 922 million (or USD 1.8 billion annualized), then the price to earning ratio (PER) is only around ~2x. Incredibly cheap.

The Transaction Mechanism

Furthermore, how is the transaction mechanism to sell AAI? Based on the disclosure, ADRO will sell the AAI’s shares to all its shareholders. That means if you still own ADRO stock now, later, you will have the rights to buy AAI shares at PER only 2x. Automatically, after the transaction, the ADRO’s controlling shareholders will also become the AAI’s controlling shareholders. As of today when I wrote the article, here are the controlling shareholders of ADRO:

1. PT. Saratoga Investama Sedaya (SRTG) (owned by Sandiaga Uno and partners)
2. Thohir’s family corporation (Erick & Garibaldi Thohir)

Thus, you don’t need to worry that after the spin off, AAI will still have the controlling shareholders.?

If there are any leftover shares, the shares will still be owned by the Company. So if there are any of you who do not buy AAI shares, then those shares will still belong to ADRO. No worries.

By the way, how can the ADRO shareholders get the money to buy AAI shares? Later, ADRO will distribute dividends to the shareholders. According to the disclosure again, ADRO is considering paying dividends to the shareholders after the RUPS. The shareholders, on their own decision, can use the cash dividends to buy AAI. There is still no information regarding how much the dividend is. However, based on the rumors, the dividend yield can be up to 30%. Well, the yield number is of course depending on how much the dividend paid by the company & your average buying price of ADRO’s shares. For example, if you own ADRO's share at a lower price, then it might be possible to have a 30% yield. Nevertheless, for clearer information regarding the spin off, let’s wait for ADRO’s shareholders meeting (RUPS) on 18th of October 2024.?

What do I Think

What do I think about this spin off corporate action? Before we jump to my answer, let’s summarize the possibilities first:

1. For a while, ADRO will become a company with net loss in its income statement (currently, >100% ADRO’s net income is generated by AAI) although they’ll also receive a huge chunk of cash through AAI spin off
2. ADRO’s shareholders might receive huge dividends which they can use buy AAI at only 2x PER?
3. There is a possibility that after the Initial Public Offering (IPO), AAI share price might have skyrocketed just like when ADMR did the IPO. Who knows?
4. After the spin off (ADRO becomes a net loss company) and paying dividends, ADRO’s share price might go down. How many %? I don’t know :)

In conclusion, my answer is:

If you have ADRO stock at an average IDR 2xxx or even less, I think it’s okay to hold the stock & go buy AAI stock later (you might get a huge dividend anyway). Nevertheless, if you currently don’t own ADRO and plan to buy it at the price now at >IDR 3900, then I don’t recommend you to buy it. Why? Because I don’t think it’s worth the risk. The possibilities of ADRO’s share price to go down after the dividend & spin off is really concrete. How many % can ADRO stock go down? I have no clue. Can ADRO share price go up even after the spin off & paying dividend? It’s possible but I don’t think it’s going to happen. Can the possible decrease in ADRO’s stock price later be offset with the increase in AAI stock price after the IPO? It’s hard to say. How many years does it take for ADRO to become profitable again after the AAI spin off? Only God knows. If something is too unpredictable, forget it. Always do your own research, and do it at your own risk.?

“Rule number one: Never lose money. Rule number two: Never forget rule number one.” - Warren Buffett

Happy Investing!