Semen Padang bosses rebel against shareholders

Vincent Lingga, The Jakarta Post, Jakarta

The imbroglio over state-owned PT Semen Padang cement manufacturer in West Sumatra took another twist after the company's management refused to convene an extraordinary shareholders meeting to replace its board of directors.

It is now already one month after state-owned PT Semen Gresik, which owns 99.99 percent of Semen Padang, asked for the meeting. Based on the company's statutes, publicly-listed Semen Gresik can ask for an injunction from the district court in Padang to force the Semen Padang management to implement the shareholders' request.

However, informed sources said Semen Gresik seemed doubtful that the district court would have the courage to issue such an order because Semen Padang, with support from the governor and the provincial legislature, has stepped up its campaign for a total spin off from Semen Gresik.

That is quite a bizarre, chaotic situation and a blatant violation of the property rights of the Semen Padang shareholders, including the investing public through their ownership of 23.46 percent of Semen Gresik and Cemex Asia Holdings Ltd. of Mexico with 25.53 percent.

The Semen Padang management, headed by Ikhdan Nizar, has taken an increasingly rebellious stance since receiving the order from Semen Gresik, going all out to defend its position.

In the meantime, the company, burdened with heavy short-term debt, may default on Rp 627 (US$67 million) billion in loan repayments due this year.

The management and board of commissioners have asked for support from the West Sumatra governor and legislature to oppose the shareholders' order and even helped organize mass demonstrations in the province early last month to build up public opinion and support for its campaign.

They shamelessly argued that since Semen Padang was now under the control of the West Sumatra administration and legislature, the shareholders could not ask for any change in the management without prior consultation with the governor.

The directors seemed to be too senseless and mindless to realize that the move by a group of West Sumatra people last October to unilaterally take "control" of Semen Padang and the legislature's decision to endorse the action, were entirely illegal and did nothing to change the legal status of the company.

Citing the 1995 Law on Limited Liability Corporations, the commissioners and management argued that the board of directors could be replaced before the end of their tenure only if they performed poorly.

The management flaunted its achievements by reporting a 20.86 percent rise in sales revenues to Rp 1.35 trillion (US$145 million) in 2001 and a 4.4 percent increase in gross operating profit to Rp 185.78 billion.

However, an analysis of Semen Padang's financial report for 2001 concluded that, similar to its miserable position in 2000, the company remained the worst performer among the three cement units in the Semen Gresik Group.

Semen Gresik in Surabaya, East Java and Semen Tonasa in South Sulawesi, are the other two units.

Semen Padang is even on the verge of defaulting on Rp 244 billion in short-term liabilities due in August and another Rp 383 billion later this year.

The company did make a turnaround last year with a net profit of Rp 34 billion, against a loss of Rp 46 billion in 2000. But this earning was much lower than the Rp 43 billion profit gained by Semen Tonasa, which has a smaller production capacity.

Moreover, Semen Padang's profit last year was attributed largely to the sharp decline in its foreign exchange losses to Rp 51 billion from Rp 166 billion in 2000.

Semen Padang's gross profit margin (earnings before interest) was only 13.9 percent, as against Semen Gresik's 26.3 percent and Semen Tonasa's 16 percent, its return on assets was only 1.8 percent, compared to Semen Gresik's 4.7 percent and Semen Tonasa's 3.3 percent.

Worse still, its return on equity was a mere 4.5 percent, as against Semen Gresik's 10.2 percent and Semen Tonasa's 6.4 percent. Its liquidity position was also dangerously low at 0.7, compared to Semen Gresik's 1.4 and Semen Tonasa's 1.2.

Still more worrisome, Semen Padang's net debt/equity ratio was 104 percent, compared to Semen Gresik's 33 percent and Semen Tonasa's 58 percent.

So strapped is Semen Padang for cash and so high is its risk factor that most major banks seem to have shunned the company, forcing it to borrow in February Rp 200 billion through the issuance of six-month notes to the state-owned Jamsostek labor insurance company at an annual interest of 21.75 percent.

Several analysts wondered why Jamsostek still took such a great risk by buying Semen Padang's debt instrument while its management was revolting against the company's shareholders.

They estimated that Semen Padang would have to quadruple its sales revenues to about Rp 5 trillion -- something that is surely impossible to achieve -- to be able to pay the Rp 627 billion in debts maturing this year.

The company's production costs increased steeply even though most of its mineral inputs and the coal to fire its kilns are sourced nearby. This only validated the allegations of many, that there have been some questionable deals done by Semen Padang with politicians, officials and crony businesspeople in West Sumatra, who are cosponsors of the spin-off campaign.

But despite its cash flow problems, Semen Padang has spent a great deal on the spin-off campaign from Semen Gresik.

The company even deducted 10 percent of the annual bonus of its employees to raise more funds for the campaign. The Semen Padang trade union claims that the deduction was made with the consent of the employees themselves, but many workers have quietly complained about the arbitrary cut.

While squeezing its own employees, Semen Padang recently gave away Rp 270 million in cash "gifts" to many provincial legislators, according to local legislator Moh. Zen Gomo, who claims to be the only one of the 55 members of the province's assembly that rejected the cash "gift".

So desperate was the management to develop a favorable public opinion environment for its spin-off campaign that it once considered putting an equity stake in a local daily newspaper, Mimbar Minang.