FINANCIAL CASE BASE STUDY:

KRAKATAU STEEL (B): GLOBAL COMPETITION

A Case Study in Financial Management (MM5007)

Syndicate 2:
Christyna P. Carna (29117506)
Dennis Suryana (29117396)
Gina Hudayana (29117508)
Laksamana Virtuecrat (29117393)

Lecturer:
Maryat Nirwandi, MBA

CLASS OF CCE 58
MASTER OF BUSINESS ADMINISTRATION
INSTITUT TEKNOLOGI BANDUNG
2018
I. EXECUTIVE SUMMARY
Currently Krakatau Steel has been claimed as the biggest steel company in Indonesia. Going global
is another step that Krakatau Steel must take. Having corporation with POSCO, the biggest steel
company in South Korea to make a joint venture which requires 388 hectares land. Therefore Anto, a
financial analyst in PT Krakatau Steel, would like to see the position and the opportunity of PT Krakatau
Steel to compete with other global steel companies. This assessment will also be used as a mean to find
an appropriate company as a benchmark.

II. CASE OBJECTIVE

Anto will use three reputable global steel companies which come from different region in the
world. Those three steel companies are Arcelor Mittal (Luxembourg), POSCO (Pohang Iron and Steel
Company, South Korea) and U.S Steel (United States Steel Company). Besides Anto will also use PT
Gunawan Dianjaya Steel Tbk and PT Jaya Pari Steel Tbk as a local comparison.

III. KEY ISSUES

Anto use several ratios to compare Krakatau Steel financial performance to other similar
industries. Using the Moody Scoring, Anto need several indicators to use as shown below;

To determine by implementing Moody’s Scoring, there seven rating stages. Those stages differ
from Aaa to Caa. Aaa rating is the best score that company could have, while reaching the lowest score
company could have is Caa. There is various score as well attached by its stages, from six to zero. Below
are shown rating stages in Moody’s Scoring.

Aaa Aa A Baa Ba B Caa

6 5 4 3 2 1 0

Based on the data above, PT Krakatau Steel lightly have a greater score than the other
international and national companies. It shown that by having numbers in their volatility and operating
performance which exceeded than the other divisions.
IV. ANALYSIS

Krakatau Steel Rating Sub-factor Weighted Gunawan Dianjaya Steel Rating Sub-factor Weighted Jaya Pari Steel Rating Sub-factor Weighted
Scoring Scoring Scoring
Categories Weighting Factor Score Categories Weighting Factor Score Categories Weighting Factor Score
2008 2009 2010 2008 2009 2010 2008 2009 2010
1 Net Consolidated Sales (in million) $ 6.125,20 Baa 3 25% 0,75 $ 744,85 Caa 0 25% 0 $ 171,05 Caa 0 25% 0
2 Operational Diversity
1 Size and Business profile
3 Regional Diversity 5 A 4 10% 0,4 3 Baa 3 10% 0,3 2 Ba 2 10% 0,2
4 Import Threat/Export Reliant

Ebit Margin (Average EBIT of three

1 years/Average Revenue of three 6,20% B 1 10% 0,1 9,70% Baa 3 10% 0,3 24,01% Aa 5 10% 0,5
years

Operating Performance
2 Return on Average Tangible Assets
and Volatility 2 7,22% Baa 3 5% 0,15 14,93% A 4 5% 0,2 30,17% Aaa 6 5% 0,3
(EBIT/Total asset - other asset

Volatility based on the Coefficient

3 2,19% Aaa 5 10% 0,5 0,96% Aaa 6 10% 0,6 0,02% Aaa 6 10% 0,6
of Variation of CFO/Net sales

1 Debt/Capital 46,20% Baa 3 15% 0,45 38,45% A 4 15% 0,6 26,97% Aa 5 15% 0,75
3 Financial Policies
2 Debt/EBITDA 5,85 Caa 0 10% 0 4,03 B 1 10% 0,1 2,04 Baa 3 10% 0,3

1 EBIT/Interest 3,01 Ba 2 5% 0,1 5,04 Baa 3 5% 0,15 64,76 Aaa 6 5% 0,3

4 Financial Strength 2 CFO-Div/Debt 9,28% Aaa 6 5% 0,3 4,45% Caa 0 5% 0 54,28% Aa 5 5% 0,25
3 FCF/Debt 4,41% Ba 2 5% 0,1 1,98% B 1 5% 0,05 11,98% Baa 3 5% 0,15
Total 2,75 2,25 3,2
Rating Baa3 Ba1 Baa2

POSCO Rating Sub-factor Weighted Arcelor Mittal Rating Sub-factor Weighted United Steel Rating Sub-factor Weighted
Scoring Scoring Scoring
Categories Weighting Factor Score Categories Weighting Factor Score Categories Weighting Factor Score
2008 2009 2010 2008 2009 2010 2008 2009 2010
1 Net Consolidated Sales (in million) $ 118.220,00 Aaa 6 25% 1,5 $ 268.071,00 Aaa 6 25% 1,5 $ 39.470,00 Aaa 6 25% 1,5
2 Operational Diversity
1 Size and Business profile
3 Regional Diversity 7 Aa 5 10% 0,5 7 Aa 5 10% 0,5 6 Aa 5 10% 0,5
4 Import Threat/Export Reliant

Ebit Margin (Average EBIT of three

1 years/Average Revenue of three 11,93% Baa 3 10% 0,3 5,50% Ba 2 10% 0,2 3,29% B 1 10% 0,1
years

Operating Performance
2 Return on Average Tangible Assets
and Volatility 2 10,05% A 4 5% 0,2 3,76% Ba 2 5% 0,1 2,77% Ba 2 5% 0,1
(EBIT/Total asset - other asset

Volatility based on the Coefficient

3 2,12% Aaa 6 10% 0,6 4,97% Aaa 6 10% 0,6 1,43% Aaa 6 10% 0,6
of Variation of CFO/Net sales

1 Debt/Capital 48,30% Baa 3 15% 0,45 52,00% Ba 2 15% 0,3 74% Ba 2 15% 0,3
3 Financial Policies
2 Debt/EBITDA 2,94 Baa 3 10% 0,3 7,21 Caa 0 10% 0 12,19 Caa 0 10% 0

1 EBIT/Interest 11,12 Aa 5 5% 0,25 6845,33 Aaa 6 5% 0,3 2,49 B 1 5% 0,05

4 Financial Strength 2 CFO-Div/Debt 19,87% Ba 2 5% 0,1 12,18% B 1 5% 0,05 3,64% Caa 0 5% 0
3 FCF/Debt 10,27% Baa 3 5% 0,15 9,68% Baa 3 5% 0,15 2,33% B 1 5% 0,05
Total 4,2 3,55 3,15
Rating A2 A3 Baa2

Looking at PT Krakatau Steel Company’s performance so far by the financial statement and
those scores, it is proved that this company are still capable to compete and growing in the long-term.
In addition, this company reach the score Baa3, which indicates that this company signified as healthy
company.

If this analysis is used as decision base wheter to invest or not, Anto should invest in Krakatau
Steel as their Moody’s rating score is better than the other Industries. As we can see, from average year
2008 to 2010, Krakatau Steel’s Moody’s rating score is Baa3.
V. CONCLUSION

The result outcome shows that PT. Krakatau Steel score is Baa3 (1.65). Compared to other local
company, PT. Jaya Pari Steel scores the highest. POSCO however has scored Baa1 (3.35), therefore
financial strength of PT. Krakatau Steel needs to be improve if compared with POSCO and they wanted
to ensure balance in joint venture.

To be the best in the global competition, PT. Krakatau Steel needs to expand it’s market share and join
venture with a global company is must. Based on the calculation, joint venture and collaboration with
POSCO is a great opportunity for PT. Krakatau to initiate a healthy global competition.