Beta of Equity

I.      Brief Description of the Company

Semen Gresik, Tbk. is a company which is engaging in cement industry. Officially inaugurated on August 7, 1957 by the first President of the Republic of Indonesia with installed capacity of 250,000 tons cement per year. On July 8, 1991, Semen Gresik was listed at the Jakarta Stock Exchange and Surabaya Stock Exchange and was the first State-owned Enterprise publicly listed by offering 40 million shares to the public. Its shareholding composition was Government 73% and the Public 27%.

In September 1995, Semen Gresik performed right issue I, which changed the share ownership composition to the State 65% and the Public 35%. In September 15,1995 Semen Gresik acquired SP and ST, which was then known as Semen Gresik Group (SGG). The total installed capacity of SGG was 8.5 million tons of cement per year.

On September 17, 1998, the Government sold its 14% shares in SGG through an open tender, in which Cemex S.A. de C.V, a Mexico­based global cement company, was declared as the winner. The share ownership composition was then changed to the Government 51 %, the Public 35%, and Cemex 14%. As of September 30, 1999, the share ownership composition has changed to the Government 51 %, the Public 23.5%, and Cemex 25.5%. Meanwhile, SGG has an installed capacity of 15.82 million tons cement per year.

On July 27 2006 Cemex S.A. de C.V. shares were sold to Blue Valley Holdings PTE Ltd., so that the share ownership composition has changed to the Government 51,01%, Blue Valley Holdings PTE Ltd. 24,90% and public 24,09%. Presently, the real installed capacity of SGG has reached 16,92 million tons per year, and it covers about 46% of domestic cement market.

II   Arithmetic Average Stock and Market Return and Standard Deviation

      

	Stock return (SMGR)	Market index (IHSG)	Market index (LQ45)
Average return	0,13%	0,06%	0,04%
Standard deviation	2,64%	1,6%	1,87%

^*The graphic of the average stock and market return is attached in the appendix

Standard Deviation is the standard statistical measure of the spread of a sample. In finance, standard deviation is applied to the annual rate of return of an investment to measure the investment's volatility. Standard deviation is also known as historical volatility and is used by investors as a gauge for the amount of expected volatility.

A volatile stock will have a high standard deviation while the deviation of a stable blue chip stock will be lower. From the standard deviation of Semen Gresik, we can see that Semen Gresik has high percentage than the standard deviation of the stock market both IHSG and LQ45. So, we can conclude that Semen Gresik has volatile stock, it is proved also by the graphic that view us how the stock return follow the trend of market return (both IHSG and LQ45).

III   Beta of Company using Regression Analysis

·            IHSG market index

LQ45 market index

 Semen Gresik has 2 measurement of risk (beta) based on IHSG market index and LQ45 market index. In IHSG market, beta is 1,03 and 0,88 in LQ45 market index.

IV        Capital Asset Pricing Model (CAPM)

           The capital asset pricing model is mainly focus on the relationship between risk and expected return of stock. Stocks of the company that have higher rate of returns certainly have high risks to carry with. Reversely, if the investors want the low risk of stocks, they aim for lower expected rate of return.

Risk of the stocks can be measured by beta of stocks. The relationship between expected return and beta can be expressed by the following equation :

 

This formula implies that the expected return of security is linearly related to its beta. If beta equals with 0, it means that the expected return of the security equal with risk free rate. Another point of view, if beta equals with 1, it means that the expected return of the security equal with the expected return on market.

To measure the expected return on security, in this case, Semen Gresik’s stock, we use the formula above and summarize the data into the table below. 

·        IHSG market index

Expected market return	Beta	Risk free rate	Expected return of stock	Actual return of stock
0,06%1	1,03 *	0,02%**	0,06%	0,13%[1]

·        LQ45 market index

Expected market return	Beta	Risk free rate	Expected return of stock	Actual return of stock
0,04%1	0,88 *	0,02%**	0,038%	0,13%1

From the table above, it’s clearly seen the distinctive between the two of market index. In IHSG market index, the beta (1,03) was higher than the beta in LQ45 market index (0,88). It’s previously mentioned that the higher risk (beta) means the higher expected return of stock. In IHSG market index, the expected return of stock is 0,06%, higher than in LQ45 market index by 0,022% (0,038%). The expected return of stock follows the trend of the expected market return (the market return were 0,06% (IHSG) and 0,04% (LQ45)).

From historical data of average stock return (SMGR), it shows 0,13% as actual return of stock. It’s expected in the next period/term, with the certain risk, the expected return of stock will be 0,06% (comparison with IHSG market index) and 0,038% (comparison with LQ45 market index). The actual stock return was much higher then the expected stock return, it’s a sign that the company may be able to cover the expected return of stock for the next period.

     The asset pricing model has a basic graphic assumption shown below.

In our cases, we show you the customized graphic of asset pricing model (picture of graphic)

In the graphic above, the SML graph originally represent about asset pricing model formula. The security market line is a useful tool in determining whether an asset being considered for a portfolio offers a reasonable expected return for risk. The SML line is viewed as required rate of return. Say for example, with the same price of securities, if the expected return on the security is higher than the required rate, then security is undervalued/underpriced. Reversely, if the expected return on the security is lower than the required rate, then security is overvalued/overpriced.

Based on graphic, both of expected stock return, from IHSG and LQ45 , have the expected security return almost same with the required rate of security return. It means that Semen Gresik’s securities (stocks) have reasonable expected return for risk. It attracts the investor because it gives the clear direction related to the risk and return of stocks.

V  Hypothesis testing

     Generally, the hypothesis testing is a kind of procedure based on sample evidence and probability theory to determine whether the hypothesis is reasonable statement. We use the hypothesis testing as an evidence to check whether there is relation or no relation between the expected return of stock and the risk (beta) of stock.

     1.     Ho = There is no relation between the risk of stock (beta) and stock return

     Ha = There is relation between the risk of stock (beta) and stock return.

2.     Criteria

      The value of t calculated < t table, Ho accepted

      The value of t calculated > t table, Ha accepted

3.    Statistic test

       Stock return and IHSG market index

     Stock return and LQ45 market index

 With significance of 0,05% (two-tailed) and degree of freedom  , the t-table shows 1,96. Based on the t-calculated above, one with IHSG index shows 28,38 and the other with LQ45 index shows 28,17. In short, both of the t-calculated number are higher than the t-table one (28,38 > 1,96 ; 28,17 > 1,96).

 The other interpretation, the adjusted R square in IHSG is 39%. It means that 39% of stock return is affected by independent variable of beta. The remaining 61% is affected by other variables. Same interpretation is also due to LQ45 market index.

       4.  Decision

           The value of t-calculated > t-table, Ho rejected and Ha accepted

       5.  Conclusion

            There is relation between the risk of stock (beta) and stock return 

VI  Values of Betas

               Beta is the measure of stock’s risk in comparison to the market as a whole. It’s used in the capital asset pricing model (CAPM) that calculates the expected return of an asset based on its beta and expected market returns.

From the calculation in the previous section, we can see there’s different result between the beta of IHSG and beta LQ45. It’s come up because there’s a different of market index benchmark. IHSG is the benchmark of the performance of all of stocks that are listed on BEI. Meanwhile, LQ45 is the average stock price from 45 stocks that have highest liquidity on BEI, known as blue chip. It’s shown that the minimal expected return that investors expect from LQ45 is only 0.04 is lower than expected return that investors expect from IHSG is only 0.06, since IHSG provides higher risk than LQ 45.

VII       Conclusion

                        Stock prices of Semen Gresik have high sensitivity towards the market index (standar deviation). Besides, it has also the beta range from 0,88-1,03. It shows that the stock of company has high risks. Even with the high risk, the actual return of  company stock can cover the requred rate of return. 

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