Portfolio: Archipelago Capital Partners and Timuraya Tunggal

Jakarta is sinking at a rate of 1-15 centimeters a year and, according to Bandung Institute of Technology, is on track to be 95% submerged by 2050 due to flooding and rising sea levels in a generally swampy region. Water-intensive industries such as chemicals production are not helping the situation.

Timuraya Tunggal, a sulfuric acid specialist controlled by Archipelago Capital Partners about an hour’s drive east of the city, has baked this issue into a three-pronged environmental, social and governance (ESG) agenda. This includes reducing dependence on the local grid by producing electricity on site using excess steam, switching its core equipment fuel from coal to gas, and rethinking its use of water.

“We have stopped taking water from the underground water table, which was taking water away from residential areas and creating instability in the soil,” says Eng Khim Lim, Timuraya’s CEO. “We are now taking water from canals and the river, recycling it, and processing it for our consumption. That has been a little more expensive, especially the capital expenditure for putting in a much larger water processing plant. But our motivation was sustainability.”

Lim, who previously served as CEO of homegrown conglomerate Berlina and COO at two local banks, is also a managing director at Archipelago with 16 years of operational experience in Indonesia. He took the role of Timuraya CEO in September 2018, when the private equity firm paid about $15 million for a 100% position. This was Archipelago’s first deal from its debut fund and there were to be no risks taken by bringing in someone from outside the organization to steer the ship.

Succession deal

At the time of the investment, three of the company’s four founders had passed away, and the sole survivor was 87 years old. Archipelago got a good price because performance had floundered in recent years, but the firm believed this was not due to fundamental weaknesses in the industry or model. The vision was to transform a broadly successful but recently flagging family business into a regional champion by adopting new technologies and best corporate practices.

An overhaul of top-level management was also required, but this would be a delicate process considering the longevity of the company and the loyalty of its staff. Timuraya has been a major employer in the area since 1979 and the average tenure of employees was 18 years at the time of acquisition.

Archipelago kept two existing managers to help serve as a bridge. These included a son of one of the original owners and a family friend who had worked on a separate company with one of the founders. Despite the cultural challenges of making this kind of transition work, Timuraya’s nearly four-decade history was a strong selling point.

“This means they have survived the Asian financial crisis. They’ve survived the fall of Suharto and riots in the streets. They have survived the global financial crisis and bombings – all the ups and downs,” says Jovasky Pang, co-founder and CEO of Archipelago. “And during all this, the company was profitable, which shows you that it is extremely crisis resilient.”

Pang adds a caveat to this story, however. Timuraya did slip into the red in 2017 and 2018, when it posted a loss of IDR144 billion ($10 million) and EBITDA fell to negative IDR17.7 billion. Under Archipelago, the company achieved a profit of $6 billion in 2019. EBITDA rallied to a positive IDR33 billion in 2019 and is forecast to climb another 15% this year.

The slump was essentially due to a slow drift in strategic direction and focus, including an 18-month misadventure into coal trading and an expansion of the product suite into non-core areas. But it could also be partially connected to the political and economic earthquakes Timuraya had otherwise weathered so well.

For example, the company expanded its security staff intensively during the Asian financial crisis when local anger against Chinese-owned businesses had mounted to a fever pitch. The bulked-up security staff was kept on board during the following decades even after the danger subsided, and there were more than 60 guards on the payroll at the time of acquisition.

“Can you imagine 60 security guards?” says Pang. “Nobody steals acid. Nobody wants to go near a sulfuric acid plant.”

In the past two years, Archipelago has reduced overall headcount from 560 to 480, with a focus on removing staff in non-essential functions and building up technical talent. This has included the hiring of six engineers.

Lean and mean

Many of the most pressing fixes during this process were operational. Lim observes that initial troubleshooting efforts targeted a poorly coordinated procurement process that resulted in overstocking of materials and products.

“There were times when the finished goods were completed and ready to be shipped out, but they didn’t have proper packaging,” Lim says. “There were times they weren’t even getting the truck available on the right day to deliver to customers. Putting in a proper supply chain function helped support working capital management.”

The manufacturing side of the business always remained profitable, but it lacked pricing discipline. When the cost of raw materials ebbed and flowed, Timuraya had failed to adjust its selling prices accordingly. Lim instituted monthly monitoring of selling prices as well as a monthly check on the cost of goods manufactured and fluctuations in market demand. 

High-frequency price monitoring is necessary in the industrial chemicals space due to the tightness of supply. If one competitor shuts its plant for one of its periodic maintenance procedures – which normally last 5-6 weeks – demand and prices can spike noticeably.

Stagnancy was an issue on the distribution side as well, with the company continuing to hold on to trading arrangements that were unprofitable just because they involved a blue-chip client. Lim’s team was willing to walk away from those partnerships.

Trimming client relationships was a key part of the financial cleanup, especially in terms of accounts receivable, some of which had been outstanding for 40 months at the time of acquisition. “A lot of time, even though [customers] were defaulting and not paying, Timuraya was still supplying them with products. It had become quite slack in managing its finances,” says Pang.

The company Archipelago has built up in the past two years is a much leaner machine but still robust and expansively operational. Timuraya currently exports a range of downstream products to 19 countries, including Korea, India, Singapore, Australia, New Zealand, the US, a number of markets across Africa and Latin America, and most of Europe.

It is the second-largest independent sulfuric acid producer in Indonesia and suffers from little competitive pressure from the multinationals and state-owned enterprises that dominate the sector. That’s because the largest players tend to use 90% of their products in-house instead of supplying the broader industrial sector and almost never stray into foreign markets.

Timuraya, as a result, has only about a 3% market share in terms of production but a 20% market share in terms of supply to the industrial sector. Around 40% of its product is exported, which provides a strong currency hedge. This facet of the business could be expanded as the product mix moves increasingly into powdered forms, which are easier to export.

Recent developments on this front include the acquisition of a new sulfuric acid chiller from Japan’s Kawasaki, which cools liquid products into solids. The deal is also supporting the ESG agenda in that it has facilitated an eight-year contract to sell carbon credits to the Japanese government. This was part of a $3 million expenditure on technology and safety upgrades.

“We wanted to make sure the environment was safe and that we had the right safety standards and technical efficiencies because at the end of the day, if you want to exit, it must be at a state of health in terms of standards that an international strategic can buy it,” Pang says.

Industrialization proxy

The company is one of few Indonesian producers of premium-grade sulfuric acid, which is used in batteries, fertilizers, petroleum purification, and a range of electroplating and manufacturing processes. Sulfuric acid production is used 100% locally. Exports include potassium sulfate, ammonia sulfate, aluminum sulfate, and sulfamic acid. In the latter, which is used in flame retardants and electroplating, Timuraya claims to be the leading supplier in Korea and one of the top three globally.

In this way, sulfuric acid and its related compounds can be understood, like steel, as one of the hallmarks of an industrialized economy. These chemicals are estimated to serve as a base for about 40% of all industrial and consumer goods, including processed foods.

Indonesia is punching under its weight in this market, however. Production is insufficient to meet local demand, which is said to be growing at 3% per year. This has resulted in a steady dependence on expensive imports. Indonesia imported about 400,000 metric tons of sulfuric acid in 2019, according to government data. Meanwhile, the nine largest domestic producers have a combined installed annual capacity of only about 3 million metric tons.

This represents a massive opening for Timuraya, which is currently rolling out an expansion program that will see sulfuric acid production grow from 95,000 tons a year to 195,000 tons a year, starting in 2021. It is expected to deliver the economies of scale necessary for the company to use steam from the production process as an in-house electricity production resource. In addition to satisfying part of the ESG goals, this would shave 7% off production costs. 

The three-year plan is to combine two plants that are subscale into one large operation, which can be further expanded. Part of this involves a new gasifier, already installed, and new storage tanks, planned for a later phase.

The product mix will remain essentially the same, although there is expected to be more opportunity to pursue joint ventures for high-value downstream products that can be used in areas such as cement. It is hoped that annual sulfamic acid output will grow from 22,000 to 32,500 tons by 2021, while solid-form aluminum sulfate production increases from 12,960 to 38,880 tons a year by the end of November.

“We believe that our plans to add capacity will go a long way to filling the domestic demand of Indonesia,” says Lim. “It is anticipated that as electric vehicles [EV] continue to increase in production, the demand for nickel sulfate will also increase with support for the EV battery industry. Indonesia has about 25% of nickel reserves globally and the government intends to make a big push to create a local EV battery industry.”

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• Topics
• Southeast Asia
• Industrials
• Buyouts
• Indonesia
• Chemicals
• manufacturing
• Archipelago Capital Partners