ASSESSMENT OF BUSINESS PERFORMANCE PT TIMAH TBK AND SUBSIDIARIES1

EDUARDUS TANDELILIN

Following the declaration of Independence in Indonesia in 1945, the tin mining industry gradually came under Indonesian control as Dutch mining concessions ran out. This transfer of control culminated in 1960 with the passing of Law No. 19 which established a State Tin Enterprise Coordinating Board and State Enterprises for the three tin producing units on the islands of Bangka, Belitung and Singkep. In 1968, the four entities were brought under one single controlling state enterprise by Government Regulation number 21, coordinating tin operations under the State company PN Tambang Timah which was given control of the known tin deposits in Indonesia. The status of that enterprise was changed in 1976 to PT Tambang Timah (Persero), a limited liability corporation, with the Government of Indonesia as the sole shareholder. The company's main operations were historically centered around the islands of Bangka, Belitung and Singkep. The company operates a large fleet of bucket line dredges and controls other mining activities, primarily using hydraulic mining methods. Beginning in 1991, a major restructuring program commenced which included the closure of mining operations on Singkep and the relocation of the corporate head office to Bangka. The restructuring also included a program of modernization and the reconstruction of production facilities and a concentration on core business activities. The conclusion of the restructuring program of Timah was listed on the Jakarta, Surabaya, and London Stock Exchanges on 19 October 1995. The name PT Tambang Timah Tbk was changed to PT Timah Tbk on July 29, 1998. The government of Indonesia owned 65 percent of the companys shares; domestic and international investors owned the remaining 35 percent. BACKGROUND PT Timah Tbk was the only state enterprise active in tin mining. Timah's competitive edge was a result of the integration of each step in the process of producing and marketing tin. The company was a cost leader. Control over substantial reserves, ownership of the largest dredge fleet in the world and the use of computer systems and satellite communications helped to minimize Timah mining costs. The use of production systems ensured Timahs smelting operations
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This case was written by Dr. Eduardus Tandelilin of Master of Management Program Gadjah Mada University, Yogyakarta, Indonesia. The author wishes to acknowledge research funding from Master of Management Program, Gadjah Mada University. This case is intended as a basis for class discussion rather than to illustrate either effective or ineffective handling a financial matter at the firm. Any interpretation of the data as well as any errors or omission is the responsibility of the author. Research assistance was provided by I Wayan Nuka Lantara and Lukas Purwoto.

Copyright 2001. Allright reserved. This publication is protected by Copyright and permission should be obtained from MM GMU.

were highly efficient. The results claimed by management were that Timah customers received the highest-quality tin available worldwide. Geographically and geologically, Indonesia was a wealthy country. Across the inland and offshore tin reserves controlled by Timah, the mineral deposits were some of the best in the world. The company held tin exploration and mining rights until 2025 of more than 10,000 square kilometers spread across several islands and offshore areas in the Java Sea. Timah had secured rights for gold exploration in North Sumatra, Kalimantan and Java. These rights extended over 27,000 square kilometers. Even after a long history of tin mining, a large portion of Timah's mining rights were as yet unexplored and untapped. The future appeared to hold vast potential for further mining. At Mentok, in the northwest corner of Bangka, Timah established the largest tin smelting operation in the world. Completed in 1967, the plant underwent further increases in capacity with the addition of a seventh furnace, which raised capacity to 50,000 tons in 1997. Adjacent to the smelting operations was the largest of five washing plants operated by the company. The central washery received tin concentrate from both offshore and onshore mining operations. Using a number of different processes the tin concentrate was upgraded to approximately 74% tin content. A small amount of heavy mineral byproducts were generated by these operations and sold. Smelting at Mentok produced crude molten tin and generated recyclable by-products known as dust and hardhead. Crude tin was further refined in a smelting kettle. Waste from refining, known as tin dross, was also recycled. Since 1995 until the present, Timah has been achieving ISO-9001 and ISO14001 in several production units. This effort would be continued for other production units. Management considered that such certification was a must to strengthen their global position as a world-class company. SUBSIDIARIES OF TIMAH As a Holding Company, Timah formed a center for the formulation and control of corporate strategy, and ensured that synergy existed between the operations of the various subsidiary companies in the process of creating and adding value. Timah determined the overall corporate structure of the Group, overall marketing strategies, budgets and allocation of funds. It managed corporate finances and the financial affairs of its subsidiaries, it set the Group's values and norms, and it determined the course of corporate development of its subsidiaries through alliances and/or acquisition. PT TAMBANG TIMAH Tambang Timah is established in June 1998. It is the largest World Company in area of integrated tin mining. The scope of the business is in the mining of tin and other minerals, extractive of industry, trade, and service. The company claimed that the production cost was still categorized in lower cost. In 1999, Tambang Timah established two units of large mining for project try-out to explore the deep alluvial deposit. PT TIMAH INDUSTRI Timah Industri was established in June 1998. It conducts trade, reengineering, engineering of industry, and service. At this time, the customers were
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separated into two markets: a tin market and a non-tin market. The tin market was the largest. Management was intended to expand the non-tin market incrementally in the future. One of the strategic chances was the development of a dockyard industry. Timah Industri achieved certification of ISO 14001 in 1998 and ISO 9001 in 1999. By achieving of these quality standards, the company became more competitive in the free market. PT TIMAH EKSPLOMIN Timah Eksplomin was also founded in June 1998. The business provides services in investigation of mining, mining, analysis of laboratory, conducting a feasibility study, and investigation of technical geological and geohydrology. Exploration of the areas of Banka and Belitung was conducted. The other effort was finding the deep alluvial deposit. Moreover, core competence in the exploration of the sea also opened a new market to Timah Explomin. PT TIMAH INVESTASI MINERAL Timah Investasi Mineral was established in 1997. This company was intended to conduct mining, investment activities, and services of recommendation and consultation in the mining area. For these purposes, the company got licenses and mining authority in several provinces. The director stated that the company began operations in September 1996. It had not yet resulted in operational revenue; however, the company was doing some exploration of gold, diamond, and coal mining possibilities. FINANCIAL PERFORMANCE Table 1 shows the summary of financial statement of Timah from 1997 to 1999. Management confessed that 1999 was a year full of challenges. Net profit increased 191% to Rp518.8 billion in 1998, and then experienced windfall profit in 1999. One factor to explain this is that the financial performance in 1998 was not real, but maybe just a result of the decline in rupiah value. Meanwhile in 1999, the increase in rupiah value appeared to negatively affect Timahs performance. However, management commented that the bad performance in 1999 had been caused by external factors such as economic conditions.2 The financial performance of the four subsidiaries of Timah also failed to show satisfactory results. Highlights of the four subsidiaries financial conditions in 1999 are shown in table 2. Although three subsidiaries, Tambang Timah, Timah Eksplomin, and Timah Industri, showed an increasing trend in sales, they did not exhibit increases in net income. This was caused by the increase in the subsidiaries costs. For example, Timah Eksplomin had experienced an increase from Rp 33.9 in 1998 to Rp 63,605 in 1999. However, the net income decreased from Rp 1, 943 million in 1998 to Rp 0,807 million in 1999. Timah Investasi Mineral even experienced a decline in its financial performance. The company did not make a sale in 1998 and 1999 but still suffered large operational costs. This condition caused the company to lose Rp 16,809 million in 1998 and Rp 16,028 million in 1999.
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From annually report, 1999.

The results of the financial performance of Timah and its subsidiaries in following two years motivated management to evaluate the companys achievement. Evaluation was intended to analyze Timahs performance and the contribution of the subsidiaries to that overall performance. Besides that, this analysis allowed management to identify an alternative solution that would improve Timahs performance as a corporation and also improve the subsidiaries performance. Unfortunately, there are so many tools for doing performance assessment. It is important to analyze trends in ratios as well as their absolute levels, for trends give clues as to whether the financial situation is likely to improve or deteriorate. In common size analysis, all income statement items are divided by sales, and all balance sheet items are divided by total assets. In the percentage change analysis, growth rates are calculated for all income statement items and balance sheet accounts. The financial ratios are also interrelated as a system. The Du Pont method is one of the first to segregate into their components and focus on the linkages to return on equity as the key result. It represents a model of its business as in figure 1. Performance assessment via financial statement analysis is based on past data. Any insight data gained will be relative, because business and operating conditions vary so much form company to company and industry to industry. Table 3 shows several ratios of similar companies listed on the Jakarta Stock Exchange in the mining industry. The Government of Indonesia also has determined an indicator to assess the health of state owned company (SOC). The main indicator is shown in appendix 1 and 2. Ratios are not absolute criteria: they serve best when used in selected combinations to point out changes in financial conditions or operating performance over several periods and as compared to similar businesses, industry norms, or other potential standard comparisons.

Table 1. Summary of Financial Statement for PT Timah Tbk BALANCE SHEETS (million rupiah) 1997 1998 1999 Current Assets: 584,638 970,754 838,432 Cash on hand and in banks 24,957 255,704 216,845 Time deposits 37,844 17,854 25,483 Trade receivables 96,215 96,310 73,445 Inventories 149,426 406,144 357,933 Investments 55,042 130,802 121,580 Fixed Assets-Net 369,161 444,101 572,025 Other Assets 141,317 151,327 204,460 Total Assets 1,150,15 1,696,98 1,736,49 8 4 7 Current Liabilities: Bank borrowings Trade payable Taxes payable Long-term Liabilities Minority Interests in Subsidiaries Total Liabilities Paid-up capital Additional Paid-up capital Retained earnings Total Shareholders Equity 326,413 167,562 31,038 22,895 11,118 2,632 340,163 251,651 120,792 437,552 809,995 415,567 8,483 82,544 151,051 13,993 2,384 431,944 251,651 120,792 892,597 1,265,04 0 2,034,56 1 672,975 1,361,586 256,748 1,104,838 (364,532) 740,306 518,828 1,031 2,513 409 5,375 326,842 4,709 59,051 97,394 17,465 2,007 346,314 251,651 120,792 1,017,740 1,390,18 3 1,694,83 9 944,244 750,595 240,684 509,911 (25,412) 484,499 318,039 632 2,762 247 4,875

INCOME STATEMENTS Net Sales Cost of Goods Sold Gross Profit Operating Expenses Operating Profit Other Income (Expenses) Profit before Taxes Profit after Taxes Per Share Data (Rp) Earnings per Share Equity per Share Dividend per Share Closing Price 691,614 396,395 295,219 98,386 196,833 59,672 256,505 177,813 353 1,609 141 5,900

Sources: Indonesian Capital Market Directory 2000

TABLE 2. SUMMARY

OF

FINANCIAL STATEMENTS FOR SUBSIDIARIES, DECEMBER 31, 1999 (THOUSAND RUPIAH) BALANCE SHEETS
PT TAMBANG PT TIMAH TIMAH EKSPLOMIN PT TIMAH INDUSTRI PT TIMAH INVESTASI MINERAL

Current Assets: Cash on hand and in banks Trade receivables Inventories Investments Fixed Assets-Net Other Assets Total Assets

1,201,007,5 45 7,465,132 61,194,556 252,329,40 3 337,642,25 4 93,749,116 1,632,398, 915 618,838,46 7 21,948,491 91,504,236 21,070,405 639,908,8 72 500,000,00 0 492,490,04 3 992,490,0 43

13,996,369 106,456 4,574,022 17,390,511 31,386,88 0 24,171,379 1,741,892 835,548 242,023 24,413,40 2 5,000,000 1,973,478 6,973,478

487,996,82 8 341,564 70,787,354 105,341,13 3 39,451,982 226,636,92 2 754,085,7 32 536,238,54 6 30,047,038 4,712,471 1,122,864 537,361,4 10 200,000,00 0 16,724,322 216,724,3 22

829,748 544,098 71,000 2,218,767 25,271,133 28,390,64 8 479,508 449,245 28,169 13,419,831 7,739 13,907,07 8 43,000,000 (28,516,431 ) 14,483,56 9

Current Liabilities: Trade payable Taxes payable Long-term Liabilities Minority Interests in Subsidiaries Total Liabilities

Paid-up capital Retained earnings (accumulated loss) Total Equity

INCOME STATEMENTS Net Sales Cost of Goods Sold Gross Profit Operating Expenses Unsuccessful Exploration Operating Profit (loss) Other Income (Expenses) Profit (loss) before Taxes Profit (loss) after Taxes 1,664,589, 63,605,571 320,800,86 743 7 920,729,04 55,863,182 310,043,39 3 6 743,860,70 7,742,389 10,757,471 9 155,835,75 7,103,573 7,227,529 5 588,024,95 4 (68,746,776 ) 519,278,17 8 353,946,20 9 638,816 998,584 1,637,400 807,156 3,529,942 2,559,752 6,089,694 921,781 0 0 0 1,591,128 14,508,102 (16,099,230 ) 68,636 (16,030,594 ) (16,030,594 )

Additional information: Capital stock in shares 500,000 5,000 200,000 43,000

Sources: 1. PT Tambang Timah, Financial Statement, December 31, 1999. 2. PT Timah Eksplomin, Financial Statement, December 31, 1999. 3. PT Timah Industri, Financial Statement, December 31, 1999. 4. PT Timah Investasi Mineral and Subsidiary, Consolidated Financial Statement, December 31, 1999.

Table 3. Financial Ratios of Metal and Mineral Mining Companies on the JSX PT Aneka TambangTbk
Earning (loss) per Share (Rp) Equity per Share (Rp) Dividend per Share (Rp) Closing Price (Rp) PER (x) PBV (x) Dividend Payout (%) Dividend Yield (%) Current Ratio (x) Debt to Equity (x) Leverage Ratio (x) Gross Profit Margin (x) Operating Profit Margin (x) Net Profit Margin (x) Inventory Turnover (x) Total Assets Turnover (x) ROI (%) ROE (%) 1997 56 913 1325 23.46 1.45 2.78 0.43 0.30 0.44 0.33 0.15 2.40 0.28 4.34 6.19 1998 243 1118 104 1625 6.68 1.45 42.71 6.39 2.99 0.44 0.30 0.56 0.47 0.29 3.44 0.52 15.14 21.75 1999 183 1195 79.19 1400 7.65 1.17 43.28 5.66 2.46 0.42 0.29 0.43 0.33 0.23 2.99 0.46 10.81 15.31

PT International Nickel Indonesia Tbk

1997 178 4549 6800 38.17 1.49 1.77 0.74 0.42 0.25 0.23 0.14 2.24 0.16 2.26 3.92 1998 45 4594 2800 61.79 0.61 1.00 0.99 0.50 0.06 0.06 0.04 2.51 0.12 0.50 0.99 1999 156 4750 6300 40.45 1.33 0.72 1.02 0.51 0.18 0.17 0.10 2.99 0.16 1.62 3.28

Source: Indonesian Capital Market Directory 2000.

Figure 1. Modified Du Pont Chart for Timah Tbk and Its Subsidiaries

Return on Equity
Return on Assets (ROA)
Multiplied by

Equity multiplier: Assets/Equity

Profit Margin: Net income/Sales

Multiplied by

Total Assets Turnover: Sales/Total assets

Divided by

Sales

Divided into

Net income

Sales

Total Assets

Total Costs Costs of good sold

Subtracte d from

Sales

Fixed Assets Time deposits

Added to

Current Assets Cash on hand and in banks

Taxes

Operatin g costs

Other expenses

Trade receivabl e

Inventori es

Questions:
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1. Calculate some financial ratios for Timah Tbk for the last three years. (Include the ratios of liquidity, asset management, leverage, profitability, and market value.) 2. Evaluate the financial condition of Timah Tbk using trend analysis.

3. Evaluate the financial condition of Timah Tbk using benchmark analysis

(Antam Tbk., PGas Tbk.). 4. Construct a Du Pont system for Timah Tbk to show how some key variables interact to determine the rate of return on equity. More important, use your Du Pont system to analyze ways of improving the firms performance. How does Du Pont differ from the previous ratio analysis? 5. Give suggestions to improve the subsidiaries performance and the performance of the overall company.

Appendix 1. Performance Assessment for State Owned Company (SOC) According to Financial Minister Degree No. 829/1992 Profitability Very Healthy Healthy Less Healthy Poor Weight Conversion Value Maximum Value >12% >8% - 12% >5 8% <= 5% 75% 12% Liquidity >150% >100% 150% >75% 100% <= 75% 12.5% 150% 300% Solvability >200% >150% 200% >100% 150% <= 100% 12.5% 200% 200% Weighted Value >100% >68% 100% >44% 68% <= 44%

Notes: Profitability is calculated as profit before taxes divided by total assets. Liquidity is calculated as current assets divided by current liabilities. Solvability is calculated as total assets divided by total liabilities. The stipulation is also for SOCs subsidiary.

Appendix 2. Performance Assessment for BUMN According to Financial Minister Decree No. 198 / kmk.016 / 1998 A. Health Level of SOCs Healthy: AAA : total score (TS) > 95 AA : 80 < TS <= 95 A : 65 < TS <= 80 Less Healthy: BBB : 50 < TS <= 65 BB : 40 < TS <= 50 B : 30 < TS <= 40 Poor: CCC : 20 < TS <= 30 CC : 10 < TS <= 20 C : TS <= 10 B. Aspect and Weight of Assessment 1. Financial aspect Total weight: Infrastructure : 50 Non-infrastructure : 70 2. Operation aspect Total weight: Infrastructure : 35 Non-infrastructure : 15 3. Administration aspect Total weight: Infrastructure : 15 Non-infrastructure : 15 C. Financial Indicators and Its Weight Indicators 1. 2. 3. 4. 5. 6. 7. 8. Return on equity (ROE) Return on investment (ROI) Cash ratio Current ratio Collection periods Inventory turnover Total assets turnover Common equity to total assets Weight Infrastructure 15 10 3 4 4 4 4 6 Noninfrastructure 20 15 5 5 5 5 5 10

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D. Methods and Scores of Assessment 1. ROE = (Earning after tax / Common equity) x 100% Score ROE (%) Infrastructure Non-infrastructure 15 < ROE 15 20 13 < ROE <= 15 13.5 18 11 < ROE <=13 12 16 10 < ROE <= 11 10.5 14 7.9 < ROE <= 9 9 12 6.6 < ROE <= 7.9 7.5 10 5.3 < ROE <= 6.6 6 8.5 4 < ROE <= 5.3 5 7 2.5 < ROE <= 4 4 5.5 1 < ROE <= 2.5 3 4 0 < ROE <= 1 1.5 2 ROE <= 0 1 0 2. ROI = ((EBIT + Depreciation) / Total assets*) x 100% Score ROI (%) Infrastructure Non-infrastructure 18 < ROI 10 15 15 < ROI <= 18 9 13.5 13 < ROI <=15 8 12 12 < ROI <= 13 7 10.5 10.5 < ROI <= 12 6 9 9 < ROI <= 10.5 5 7.5 7 < ROI <= 9 4 6 5 < ROI <= 7 3.5 5 3 < ROI <= 5 3 4 1 < ROI <= 3 2.5 3 0 < ROI <= 1 2 2 ROI <= 0 0 1 * Total assets are an approximately of capital employed. 3. Cash ratio = ((Cash + Bank + Short-term investments) / Current liabilities) x 100% Score Cash ratio = X (%) Infrastructure Non-infrastructure X >= 35 3 5 25 <= X < 35 2.5 4 15 <= X < 25 2 3 10 <= X < 15 1.5 2 5 <= X < 10 1 1 0 <= X < 5 0 0

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4. Current ratio = (Current assets / Current liabilities) x 100% Score Current ratio = X (%) Infrastructure Non-infrastructure 125 <= X 3 5 110 <= X < 125 2.5 4 100 <= X < 110 2 3 95 <= X < 100 1.5 2 90 <= X < 95 1 1 X < 90 0 0 5. Collection periods = (Receivables / Sales) x 365 Collection Improvement = X Score periods = X (days) Infrastructure (days) X <= 60 X > 35 4 60 < X <= 90 30 < X <= 35 3.5 90 < X <= 120 25 < X <= 30 3 120 < X <= 150 20 < X <= 25 2.5 150 < X <= 180 15 < X <= 20 2 180 < X <= 210 10 < X <= 15 1.6 210 < X <= 240 6 < X <= 10 1.2 240 < X <= 270 3 < X <= 6 0.8 270 < X <= 300 1 < X <= 3 0.4 300 < X 0 < X <= 1 0 6. Inventory turnover = (Inventories / Sales) x 365 Inventory Improvement = Score turnover = X X (days) Infrastructure (days) X <= 60 35 < X 4 60 < X <= 90 30 < X <= 35 3.5 90 < X <= 120 25 < X <= 30 3 120 < X <= 150 20 < X <= 25 2.5 150 < X <= 180 15 < X <= 20 2 180 < X <= 210 10 < X <= 15 1.6 210 < X <= 240 6 < X <= 10 1.2 240 < X <= 270 3 < X <= 6 0.8 270 < X <= 300 1 < X <= 3 0.4 300 < X 0 < X <= 1 0 7. Total assets turnover = (Sales / Total assets) x 100% Score Total assets Improvement = Infrastructure turnover = X (%) X (%) 120 < X 105 < X <= 120 90 < X <= 105 75 < X <= 90 60 < X <= 75 40 < X <= 60 20 < X <= 40 X <= 20 20 < X 15 < X <= 20 10 < X <= 15 5 < X <= 10 0 < X <= 5 X <= 0 X=0 X<0 4 3.5 3 2.5 2 1.5 1 0.5

Noninfrastructure 5 4.5 4 3.5 3 2.4 1.8 1.2 0.6 0

Noninfrastructure 5 4.5 4 3.5 3 2.4 1.8 1.2 0.6 0

Noninfrastructure 5 4.5 4 3.5 3 2.5 3 1.5 12

8. Common equity to total assets = (Common equity / Total assets) x 100% Common equity to Total Score assets (%) = X Infrastructure Non-infrastructure X<0 0 0 0 <= X < 10 2 4 10 <= X < 20 3 6 20 <= X < 30 4 7.25 30 <= X < 40 6 10 40 <= X < 50 5.5 9 50 <= X < 60 5 8.5 60 <= X < 70 4.5 8 70 <= X < 80 4.25 7.5 80 <= X < 90 4 7 90 <= X < 100 3.5 6.5

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Notes: State enterprises (BUMN) and its subsidiaries must apply this assessment of the health level. Because this case just assesses the financial aspect, the total score should be adjusted by considering the financial aspect only. For example, the level of health AAA is achieved if the total score is larger than 95. So, this total score can be changed to 95 x 0,70 = 66.5 for the noninfrastructure business. Doing this, it means the criteria are adjusted. Alternatively, the criteria are not adjusted, but each calculated total score are adjusted by dividing 0.70. For the calculation of the collection periods, inventory turnover and total assets turnover, the chosen score is the best between the both scores. For example: PT A (BUMN Non-Infrastructure) has a collection periods of 120 days in 1999 and 127 days in 1998. The scores in 1999 are according to a) the level of the collection periods is 4, and b) the improvement (7 days) is 1.8. Thus, the chosen score is the largest, that is, 4.

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