Strategic Action to Maximize Your Profit from Adaro's Spin Off

Before you read this article, please read my previous article about the spin off details from PT. Adaro Energy Indonesia Tbk (ADRO) at the link below to get the full context of this article.

https://www.dhirubhai.net/pulse/adaros-spin-off-corporate-action-gregorius-arvan-mba-mcuxc/?trackingId=HEDbbDkCRy6fGCVQD79uIQ%3D%3D

Okay, are you done? If yes, then let’s start from the latest news about this spin off. On Monday, November 18th 2024, ADRO arranged the extra-ordinary shareholders meeting (RUPSLB) that decide:

• The Company’s name would change from PT. Adaro Energy Indonesia to PT. Alamtri Resources Indonesia with focus on renewable energy and metallurgical coal businesses. Thus, there is no more thermal coal business for the Company (the thermal coal business would be catered by PT. Adaro Andalan Indonesia (AAI) later)

• ADRO would pay cash dividend amounting to USD 2.6 billion (~IDR 41.7 trillion) or equal to ~IDR 1359/share. The cumulative (cum) date for this dividend is on November 26th 2024 and the payment date is on December 6th 2024?

• For every 100 ADRO shares that you own, then you have the right to buy 23 AAI shares (100:23)

Earlier this year, at the price under IDR 3000/share, ADRO was actually interesting since the PER is only around 3x and PBV <1x. However, since the price has been going up to around IDR 3700-4000/share due to this spin off corporate action, then in my opinion, ADRO is no longer attractive anymore. Why? Because at the current price, ADRO has PBV >1x, and moreover, ADRO would no longer control its cash cow subsidiary called AAI.

Therefore, although there is a possibility that ADRO share price might go up again due to huge dividend payout, plus the fact that all ADRO investors have the right to buy AAI shares later, I would like to tell you not to chase the train in case you don't own ADRO shares yet. On the other hand, in case you already have ADRO at a lower price (let’s say under IDR 3000), then it’s okay to hold it.

A friend asked me if they own ADRO at <IDR 3000/share, then how is the exit strategy? Well, in my opinion, right now you have 3 options. Let’s break it down here:

Option 1

You can hold your ADRO shares up to the cum date which is on November 26th, 2024 so that you can get the dividend IDR 1359/share. After that, you can continue to hold ADRO until the Company arrange PUPS (Penawaran Umum Pemegang Saham/ Public Offering) on December 6th 2024 where on that PUPS, the Company shall announce the cum right date to buy AAI shares (usually 1 week after the PUPS). Furthermore, you can still continue to hold the ADRO share until you receive the right to buy AAI shares and then execute it. After you execute and own AAI shares, then probably on December 16th, 2024 you can start to sell all your ADRO shares because at that point, ADRO has become to a “loss” Company, and it no longer has significant cash since all the cash is already distributed in the form of dividend.

If you choose this option, you may get the maximum profit with the following assumptions:

• You sell ADRO at IDR 2650/share or more where this amount is excluding dividend IDR 1359/share (so including dividend, you receive IDR 4009/share)

• You then can sell AAI shares at a higher price than the IPO price. The AAI IPO price for ADRO shareholders is equal to USD 0.38 at max (or IDR 5900-6042, rate IDR 15900 per 1 USD). This price is relatively cheap with PBV only 1 and PER 2.5x so there is a concrete possibility that on the first day, AAI share price might skyrocketing. Hence, if you execute the right to buy AAI shares at IDR 6042 then let’s say at the first day AAI share price go up to IDR ~8000, then you’ll get some profits

Nevertheless, there are also some risks that you have to consider:

• ADRO share price is almost guaranteed to go down after the dividend cum date (Nov 26th, 2024), it would probably crash down until IDR 2650/share or even lower. Although there is also possibility that it may go up again due to cum right date to buy AAI shares, but we cannot predict how far it will go up, or worse, it may go down even lower (< IDR 2000/share for example)

• If you decide to use the right to buy AAI shares, there is also a possibility that AAI share price might also go down later. Why? Remember, there are thousands of public investors who own ADRO shares. And then suddenly, they also own AAI shares. Think about this: Out of those thousands AAI investors, there must be some of them who think to sell their AAI shares, right?

• There is also a scenario where at the IPO day, AAI share prices might go down lower than the IPO price at IDR 5900-6042/share before you have the chance to sell it

Last but not least, if ADRO share price goes lower than IDR 2650/share, you can’t even think to maximize the profit, instead you’ll even suffer the loss 2 times.

Option 2 (Safer option)

You can hold ADRO and take the dividend, but if and only if the share price goes up on the PUPS date. You can sell the shares and do not take the right to buy AAI shares. So let’s say you manage to sell ADRO at IDR 3000/share, then after we sum it with the dividend amounting to IDR 1359/share, it would equal to sell ADRO at IDR 4359/share. Not a bad profit, huh?

Moreover, you would not confuse yourself whether you should buy the AAI shares or not or whether at the IPO date, AAI share price would go up/down and so on and so forth. Nevertheless, this option also has its risk if ADRO share price does not go up anymore after the dividend cum date. If this happens, there is also a possibility that you might need to sell your ADRO shares at < IDR 3000 or even less than IDR 2650.?

Option 3

Sell your ADRO shares now, or at the latest on the dividend cum date at Nov 26, 2024. By choosing this option, you would not get the dividend nor the right to buy AAI shares (capital gain only). Of course if you choose this option, your profit won’t be maximized. But the bonus is, you don’t need to overthink about AAI share price later or whether after the cum date, how many % ADRO share price might go down, etc.?

No matter which option you choose, I suggest you to exit from ADRO before 2024 ends. If you decide to use the right to buy AAI shares, and hold on to it, then that is okay too since there is a possibility that AAI share price might go up significantly after the PUPS.?

Finally, the ultimate question is: If I don’t own ADRO but I really WANT to buy it tomorrow at IDR 3700/share, what should I consider? What are the risks and rewards?

Well, let me give you a simple simulation:?

• Let’s say you buy 1000 lot ADRO shares at IDR 3700/share. It means that you spend around 1000 x 100 x IDR 3700 = IDR 370 million
• By buying 1000 lot, then you have the right to buy 230 lot AAI shares
• You’ll receive dividend from ADRO amounting to 1000 x 100 x IDR 1359 = IDR 135,9 million
• You then use this dividend to buy 230 lot AAI shares at IDR 5900/shares. It means now you also have 230 x 100 x IDR 5900 = IDR 135,7 million
• After the IPO, let’s say AAI share price goes up to IDR 11800/share. Now your asset in AAI equals to 230 x 100 x IDR 11800 = 271,4 million
• However, let’s also assume that ADRO share price goes down around 50% to IDR 1850/share. Hence your asset in ADRO now is only 1000 x 100 x IDR 1850 = IDR 185 million

In total, your asset now = IDR 185 million + IDR 271,4 million = IDR 456,4 million. Initially, your asset is only IDR 370 million (before dividend, AAI, etc.). So your “net profit” if this scenario really happens is = IDR 456,4 million - IDR 370 million = IDR 86.4 million. Free money, isn't it? Well, hold on. This scenario becomes possible if some of the assumptions above become reality. What if it doesn’t? Just tweak the numbers above by yourself, and you can estimate how much money that you may make/loss if you buy ADRO now at IDR 3700/share. Before you think about the profit, think also about the risks.

As a bonus, I would give you a comparison table that compares ADRO vs AAI share price so that you could at least reach break even point (with the assumption that you buy ADRO at IDR 3700/share). If you buy ADRO at less/more than IDR 3700, you can simply just subtract/add the difference to the ADRO price table below:

So what do you think? Are you interested in investing in ADRO & AAI? Let me know your thoughts.?

“The real key to making money in stocks is not to get the scared out of them” - Peter Lynch

Happy Investing