Dear Honorable Shareholders and Stakeholders, On behalf of the Board of Directors of PT AKR Corporindo Tbk. let us first offer praise and thanks to God Almighty. Hereby, we present Annual Report for 2017 together with the Consolidated Financial Statements audited by Public Accounting Firm Purwantono, Sungkoro & Surja (a member firm of Ernst & Young Global Limited) as a form of management responsibility for the period. The Company’s Financial Statement also has received “fair opinion in all material respects" from the auditor. This report is also one form of the Good Corporate Governance principles application that has become part of the spirit of the Company.
Global economy last year began to show some improvements, evidenced by stronger commodity prices and higher GDP growth recorded by a number of leading economies in 2017. The United States, the largest economy in the world, grew solidly with growth of 2.3%, higher than 1.6% in the previous year. Similarly, China, the second largest, which for the last 7 years had experienced a slowdown in economic growth, in 2017, rebounded with a positive economic growth of 6.9%. The improvement in global economy had a positive impact on the developing countries’ economies, especially the trading partners, including Indonesia. While Indonesia’ economy was relatively good in 2017, we saw some weak spots as well.
On the positive note, this can be seen in the trade balance of Indonesia that in 2017 finished with a record surplus of US$11.84 billion, with an increase in exports of 16.22%. Indonesia's foreign exchange reserves were also well positioned at US$130.20 billion, an increase of 11.9% compared to US$116.4 billion in 2016. Investments in 2017 indeed grew by 13% to Rp692.8 trillion, however these figures were apparently helped by fund repatriation related to tax amnesty in the previous year.
On the other hand, tax revenue realization in 2017 missed the government target. We also saw that loan growth remained slow in 2017 at only 8.24%, below the central bank’s target of 11%. Household consumption growth slowed down to 4.95% in 2017 vs. 5.01% in 2016. To boost the economy, the Indonesian Government has been formulating numerous policies, including introduction of a number of economic policy packages, coordinating policies with Bank Indonesia, maintaining stability, and providing incentives to the business world, as well as through infrastructure development.
Indonesia's economic growth during 2017 reached 5.07%, higher than the previous year's 5.02%. Inflation was recorded at 3.61%, which was higher than the previous year’s 3.02%. The Government and Bank Indonesia were also able to keep the Rupiah exchange rate against the US Dollar relatively stable in a range between Rp13,300 - Rp13,500 / US Dollar and kept the three month Treasury Notes rate at 5.3%.
Despite the challenging economic condition in 2017, especially in the first half which was relatively stagnant, the Board of Commissioners has been providing directives to the Board of Directors to maintain profitability level and to seek revenue growth, especially in some segments. Management has taken steps to reallocate its resources to ongoing projects in Indonesia, hence divestment of non-core operations in China and coal business in Indonesia. Additionally, management has also taken prudent approach in risk management including receivables and installed two new divisions under Quality Assurance: Internal Audit and Risk Management. On the financing side, management has improved its balance sheet towards more long-term funding and has repaid all of its maturing bonds. On the other hand, to mitigate the rising cost of goods sold, management has been monitoring expenses carefully. With the approval of the Board of Commissioners, in 2017 the Company took strategic measures to strengthen its cash flow, develop the retail fuel segment, and JIIPE as businesses that generate sustainable income. The strategic initiatives taken included:
1. The signing AKR joint venture agreement with BP Global to develop a wider network of non-subsidized Fuel Stations (SPBUs) in Indonesia, as well as signing of the distribution agreement of Castrol lubricants in Indonesia for the industrial, marine, mining and commercial vehicles sectors
2. Signing of joint venture with Air BP to enter the rapidly growing avtur business in Indonesia
3. Issuing bonds worth Rp1 trillion in Phase I in 2017 as part of PUB I with total amount up to Rp2 trillion, followed by payment of maturing bonds
4. Divesting subsidiaries outside the core business, including those in China, namely Guigang Ports, Khalista (Liuzhou) Chemical Industries Ltd in sorbitol manufacturing, and BKP which engaged in coal business in Indonesia, with the last two divestments targeted for completion in 2018
5. Reorganizing the Company and appointing an international consulting company to assist in the transformation. With a strong financial position, in 2017, the Company continued to develop JIIPE, its JV with Pelindo III, as an integrated industrial and port estate with efficient logistics and energy solutions thereby developing recurring business from the supporting infrastructure. The Company has also completed the first phase construction for a 23 MW power plant and its operation has started, and the Company is in the process of finalizing the construction of clean water management facilities, and is also building a gas pipeline that can be used by tenants in the industrial area.
The company has delivered a strong net profit CAGR of 21 % in 2005-2017 and poised to grow in the next years by implementing strategic initiatives. The strategic initiatives that has been taken by AKR should ensure sustainable growth. In order to prepare an effective strategy implementation, the company reviewed and is in the process of transforming its three pillars that support business activities, namely: Process, Human Resources and Technology. These 3 pillars were then translated into a transformation that included:
1. Refocusing the portfolio business and strengthening the business strategies
2. Rearranging the organization structure to support future growth
3. Preparing the Human Capital, Technology, and appropriate decision-making process that correspond to this organization In 2017, the Company appointed an international consultant to assist in its transformation.
The Company is aware that the business ahead will be more challenging, therefore, the Company has to continue to make improvements to maintain its high competitiveness. This AKR transformation program becomes an important part in developing the Company's business in the future.
Through this transformation program, AKR shall reorganize its business focus on sectors with consistent and measurable growth rates. The Company will invest in a business line where the Company has a strong competitive advantage while maintaining its core competency in logistics.
We met challenges and opportunities in 2017. In general, we experienced more competitive market and cost pressure in 2017. On the industrial diesel we were able to see sales growth of diesel fuel in mining segment, despite heavy rainfall in some mining areas, especially at end of 2017. We also recognized that demand of fuel from bunker sector was slow last year, especially in Java. On the other hand, there are some opportunities available last year that in line with our strategy. On the distribution and segment of basic chemicals, we see both volume and price grew healthily. We also have been seeing change of trend in gasoline consumption in domestic market, where consumer now buys more non regulated gasoline (RON 90 above). This is in line with our strategy to develop retail business in nonregulated gasoline market with BP.
We also have been engaged to support government program called BBM Satu Harga which aims to provide fuel at 1 price across Indonesia through our presence in some areas in Indonesia. To meet these challenges, the Company is focusing on efficiency to reduce costs in order to maintain good margins. We are also improving our customer service with guaranteed quantity and good quality products.
In 2017, the Company managed to record good performance and generally achieved its set targets. From the financial perspective, the Company has realized the following:
1. Revenue grew by 20.2% from Rp15,213 billion in 2016 to Rp18,288 billion in 2017, mainly driven by trading and distribution segment
2. Net income attributable to equity holders of the parent entity increased by 19% to Rp1,202 billion in 2017 from Rp1,011 billion in 2016
3. JIIPE industrial estate has shown good growth with sales more than doubling to Rp582 billion in 2017 from Rp271 billion in 2016
4. We have completed the divestment of Guigang Port in China to Beibu Gulf Port, with value of RMB 427.9 million for the sale of equity and recorded after tax net profit of Rp303 billion
5. We started the divestment process of our sorbitol manufacturing (Khalista in Liuzhou) by signing agreement with the local government and received RMB 96.4 million as first payment
6. Net gearing has lowered from 0.33X in 2016 to 0.16X in 2017 In addition, from the operational side, the Company has achieved the following:
1) PT Berlian Manyar Sejahtera (BMS) has been granted a concession by the Ministry of Transportation for the port service business at the Manyar Terminal in Gresik Port, East Java for a term of 76 years
2) AKR has been assigned by BPH Migas as the Business Entity Agency for the Distribution of Certain Fuel types for the next 5 years, from 2018 to 2022, and is active in supporting the government’s one price fuel program in region of 3T (The most Underdeveloped, The Frontest, and The Outermost).
The Company is optimistic about 2018, as some of the strategic initiatives taken by the Company in 2017 begin to show some positive results. The Company expects sales and revenue to grow further in 2018, driven by trading & distribution business as well as land sales in industrial estate. In the industrial diesel segment, several factors are expected to support future growth, including improvement in coal mining industry and other commodity prices.
Industrial fuel demands are also expected to increase in other areas like power, palm oil industry, and to get positive impact from the infrastructure development projects in Indonesia. For the retail sector, the Company sees a positive outlook on the high-octane gasoline market. As a continuation of the AKR and BP's joint venture, BP-AKR logo petrol stations will be first established in major cities in Java, such as Jabodetabek, Bandung, Surabaya and surrounding areas to sell nonsubsidized gasoline RON 90, RON 92 and above.
The global economic growth of 2018 is forecasted to improve, and so is Indonesia’s economic growth. The government expects GDP to grow 5.4%, with inflation around 3.5%, supported by recovery in domestic demand and infrastructure development. For the year ahead, management is consistently seeking ways to boost growth, both from existing and new clients in trading and distribution business as well as in industrial estate and new ventures.
In 2018, PT Jakarta Tank Terminal, a subsidiary of the Company, will also expands by adding 8 storage tanks with capacity of 100,000 cbm at Tanjung Priok, to be used for gasoline, ethanol and biodiesel, and additional mixing infrastructure enabling customers to comply with the Indonesian Biofuel Mixing Regulation. The expansion will bring total JTT’s storage tank capacity to more than 350,000 cbm.
In 2018, in the industrial estate segment, the Company is expected to generate revenue from land sales and utilities in line with the completion of several supporting facilities in the Estate. Power and wastewater treatment plants will start operations in 2018, and be ready to serve the growing number of tenants. We also expect to attract more potential tenants both from domestic and foreign investment, as JIIPE now is considered as Strategic National Projects.
In 2018, the Company will also complete several divestments planned in 2017. Among these are the divestment of the Khalista, a subsidiary in Liuzhou China province that produced sorbitol, and the divestment of a coal mine owned by the Company. The divestment proceeds will be used to support the Company's business development in Indonesia, which is expected to provide better returns in the future. On early 2018 Pefindo has upgraded the Company’s debt outlook to "Positive" from "Stable", and maintained its rating at "idAA-", on the basis of an assessment of further capital structure developments and the Company's cash flow control measures, supported by the significant cash flows resulting from the Company’s business divestment in China.
At the Annual General Meeting of Shareholders held on April 20, 2017, the Company's shareholders approved the distribution of cash dividends amounting to Rp479,323,015, or Rp120 (in full amount) per share, from the 2016 profit attributable to owners of the parent. After deducting the interim dividend paid on July 26, 2016 amounting to Rp279,315,902, or Rp70 (in full amount) per share, the remaining cash dividend of Rp200,007,113, or Rp50 per share (in full amount), were paid on May 19, 2017. In addition, based on a Board of Directors Decision dated July 25, 2017, and approved by the Board of Commissioners on July 25, 2017, the Company declared an interim cash dividend of Rp100 (in full amount) per share, amounting to Rp400,014,228 from 2017 interim profits attributable to owners of the parent, which has been paid on August 15, 2017.
The Company continues to pay great attention to the Human Capital aspect, and in line with the Company's transformation program in 2017, the Company has made considerable improvements in its management. In addition to the reorganization, the Company has also simplified the employee recruitment and career path planning. This is intended to provide a greater opportunity for the best talent in the Company to gain career assurance in the Company. In 2017 Human Capital development was directed at the transforming AKR towards an entrepreneurial, collaborative, inquisitive, agile, and has long-term vision. As AKR's business grows, AKR requires adaptive human capital. The Company consistently conducts employee development programs through training provided in accordance with the needs and development of the business environment. The Company provides extensive opportunities for all employees to develop their competencies. In 2017, the Company organized 79 training sessions, attended by 1,095 participants from various positions.
By 2017, AKR Technology implemented programs that have been implemented since 2016, including Automated Tank Gauging Visualization, Business Intelligence Solution System, and route Management using GPS systems. In addition, in 2017 AKR Technology also undertook several initiatives which will be completed in 2018:
1. Simplification and consolidation of technology systems
2. Automated Alerting System to perform identification and rapid resolution of problems that occur on the AKR user network server
3. Expansion of data exchange connectivity to consumers through a "Know Flow" system, so that consumers can receive transaction data automatically, and the payment process to the Company can be accelerated.
The execution of Good Corporate Governance principles in the Company continued to show significant progress. In 2017, the Company updated the Audit Committee Charter to conform with POJK No.55/POJK.04/2015 concerning the Establishment and Implementation of Audit Committee Guidelines, and POJK No.13/POJK.03/2017 concerning the Use of Public Accountant Services and Public Accountant Firms in Financial Services activities.
In 2017, the Company revised the GCG organ by establishing the Internal Audit and Risk Management division. These two divisions will complement each other whereby the Internal Audit will conduct post operational audit while Risk Management will manage the risk by undertaking a number of preventive mitigation measures. The Company has applied the principle of transparency by always reporting its business activities to both OJK and Indonesia Stock Exchange as well as other related parties within the stipulated deadlines.
The Company is fully aware that the existence and success of its business cannot be separated from the role of society and the surrounding environment. The Company believes its business will be sustainable if it provides a balanced attention to the aspects of profit, people, and the surrounding. Based on this awareness, AKR run its Corporate Social Responsibility (CSR) programs. AKR's CSR programs have the primary objective of making a positive impact, and improving the social conditions for communities and its people.
In 2017, the Company carried out CSR activities including: Packet B and C teaching and learning activities for academic year 2016-2017 in Tanah Merah - North Jakarta, books / vinyl storage assistance for old recordings archives at PT Lokananta Solo, scholarships for children of AKR employees in Surabaya, Jakarta, Banjarmasin, and Lampung, and assistance for school building improvements at SD Negeri Telaga Biru 8, Banjarmasin.
The new CSR programs intensively conducted in 2017 were linked to customers and governments, and included construction of BBM Mudik Posts along Jalur Pantura, Partnerships with Pondok Pesantren, participating in the “BBM 1 Harga” program, and the distribution of 50 Navigation Units for Fishermen in Demak, Rembang, Brebes and Tegal Districts with the Governor of Central Java.
The Company does not have a Committee below the Board of Directors. In carrying out its duties and responsibilities, the Company’s Board of Directors is assisted by Advisors and Senior Managers in charge of the various fields. During 2017, the Board of Directors considered that those below the Board of Directors demonstrated good performances in performing their respective duties and responsibilities, and provided input to the Directors related to the Company's operations.
During 2017, the PT AKR Corporindo Tbk. Board of Directors composition did not change, and is still in line with the AGMS resolution dated May 5, 2015, namely:
President Director: Haryanto Adikoesoemo
Director: Jimmy Tandyo
Director: Bambang Soetiono Soedijanto
Independent Director: Arief Budiman Utomo
Director: Mery Sofi
Director: Suresh Vembu
Director: Nery Polim
Director: Ter Murti Tiban
The good performance posted by the Company throughout 2017 also helped it gain recognition from independent parties, and included:
1. The Most Innovative Business Award 2017
2. The Best Financing Deal South East Asia 2016 (BKMS)
3. The Most Committed to Corporate Governance based on Finance Asia (ranked 8th)
4. Best Annual Report Award 2016 - Private Non-Finance Listed category
5. Top 50 Public Listed Companies based on Asean Corporate Governance Scorecard of IICD
6. Top 5 Most Admired CEO in Oil and Gas Sector (Haryanto Adikoesoemo)
7. The Most Valuable Indonesian Brands 2017 by Brand Finance Plc.
The Company has ended 2017 with a good performance. On behalf of the Board of Directors, we would like to extend our gratitude and appreciation to the Board of Commissioners for all the directions given to the Board of Directors. The same appreciation is also presented to the shareholders, customers, bankers, bondholders, and business partners for the support, confidence and cooperation that has been established. The Board of Directors also expresses its gratitude and appreciation to all employees who have worked with dedication and love in performing their respective duties and responsibilities and supported the efforts to realize the Company's vision, mission and targets, so that the Company can achieve strong and sustainable growth.