SMGR @ IDR 9,750

	SMGR (current)
Mcap	58,870
Cash	4,090
Pref.	1,538
Debt	10,288
EV	66,606
EBITDA19 cons.	6,085
EV/EBITDA19	8.89

Currently, SMGR is trading at 10.94 EV/EBITDA19.

At present, SMGR plans to acquire 80% SMCB at a price of USD 1.36bio. With the IDR 15k/USD exchange rate, this transaction is equivalent to IDR 20.4 T.

According to market consensus, SMGR will generate EBITDA of 6.09T and SMCB 1.26T in 2019.

Assumed, SMGR will borrow from a bank of IDR 20T to finance this acquisition. Assuming a loan interest of 10% p.a, the financial burden of SMGR will increase by IDR 2T/year. While the EBITDA19 SMCB portion that is entitled to SMGR is IDR 1T. So, it seems that SMCB's income is not able to finance SMGR's debt burden arising from this acquisition.

And not only that, what the market does not realize is that EV SMGR has increased sharply due to this acquisition transaction:

	SMGR post acquisition
Mcap	58,870
Cash	4,090
Pref	1,538
Debt	30,288
EV	86,606
EBITDA19	7,093
EV/EBITDA19	12.21

As a result of this acquisition, SMGR’ EV increased to IDR 86.6T.

And even though SMGR’ EBITDA19 also rose due to this acquisition, but the EV/EBITDA19 rose significantly from 8.89x to 12.21x.

In the last 10 years, which covered the boom and bust cycle of the cement industry, the average SMGR traded at 9x EV/EBITDA.

If the fair valuation of SMGR is indeed 9x EV/EBITDA, then the SMGR market cap must go down to IDR 36.10T. This means 39% downside from current price.

39% downside does look too excessive. It could be that the market consensus figure is too low.

However, even if we use the most optimistic numbers from market, namely EBITDA19 IDR 7.5T for SMGR and IDR 1.9T for SMCB, there is still a 9.22% downside from the current level.

It does not mean that the price of SMGR will actually decrease by 9.22%, but the calculation above shows that it is difficult to rejoice in the acquisition that will be carried out by SMGR.

Apart from the fairy tale regarding the cement moratorium, and also the fantasy of the synergy that resulted from this acquisition, I see that the acquisition of SMCB by SMGR is actually not needed. This will only make sense if done at a lower valuation.

Disclaimer: This article is not a recommendation to conduct transactions on the intended securities. Any consequences arising from this writing are beyond the responsibility of the author.

Catch the Falling Bird

I wrote this article some time ago, but forgot to post it. However, I find that some points are still relevant. I hope you can enjoy it.

BIRD IJ @ IDR 2,550

Description

BIRD is a transportation services company. The company offers taxis, limousines, car rentals and chartered bus. As of 2017, BIRD has 22k regular taxi, 900 executive taxi, 5k rental cars, 500 rental bus. So the total BIRD fleet is around 28,400.

The Market’s Current View

Market expectations for BIRD’ long term growth potential have declined, due to unfair competition with ride-hailing companies. Ride-hailing companies used to offer the convenience of taxi bookings, with more competitive rates.

The Opportunity

As a result of unfair business competition, market expectations of the taxi business deteriorated. Therefore, it is not surprising that BIRD share prices also plunged into abyss. BIRD’s share price has dropped 39% from the IPO price.

This creates a good investment opportunity, where low market expectations create relatively attractive BIRD valuations. At the price of IDR 2,550/share, BIRD traded at 11.53x E19, 1.09x BV19 and 5.22x EV/EBITDA19 according to the consensus of analysts.

And the fierce competition in the taxi business has caused major changes. Currently, practically there are only 2 major taxi players in Indonesia: the first is BIRD, and the second is Grab.

Taxi Express, Putra, Gamya, etc. in general have virtually almost disappeared.

At the beginning of Grab’s emergence as a disruptor, their strengths were to offer:

1. Convenience of booking through apps.
2. Convenience of payment options, whether it’s through cash or credit cards.
3. Very cheap rates because they are subsidized.

However, the current taxi business competition map is as follows:

	BIRD	Grab
Booking through apps	Yes	Yes
Availability of payment options	Yes	Yes
Irrational cheap fare	No	No longer

It seems very clear that BIRD has improved itself to be more competitive.

And some of the catalysts that happened recently created an investment opportunity:

1. The loss of other competitors, making business-pie that can be enjoyed by BIRD and Grab, enlarged.
2. Thanks to the increasingly crazy traffic congestion, the Jakarta’s government implemented a longer “odd-even” system (6AM – 9PM starting Aug18). This certainly provides additional traffic to public transportation companies such as BIRD, of which BIRD has 82% revenue exposure from Jakarta.
3. The ongoing ASEAN Games this month, will only further cause chaos in the streets. The government estimates that there will be an additional 800,000 traffic flow during the event.
4. In the past, Grab did offer very cheap rates (Grab subsidizes passengers), so as a result Grab fleet grew rapidly. However, this is only growth number. Not a profitable growth. Unless Grab is established for social purposes, it is highly unlikely the Grab subsidy scheme will continue for an unlimited period. Recent anecdotal evidence shows that Grab rates are no longer cheaper than BIRD. Even during rush hours, Grab charges premium rates to its passengers.

Financial

The company has issued its 1H18 financial statement:

	1H18	1H17	% y-y	2Q18	1Q18	% q-q
Net Revenues	1,971	2,082	-5.3%	998	973	2.5%
Direct Costs	-1,454	-1,510	-3.7%	-739	-715	3.4%
Gross Profit	518	572	-9.5%	259	259	0.1%
Operating Expense	-287	-290	-1.3%	-147	-139	5.6%
Operating Income	231	282	-18.1%	112	119	-6.3%
EBT	249	257	-3.1%	120	129	-6.7%
Net Income	192	194	-1.3%	92	100	-7.4%
EBITDA	519	623	-16.7%	254	265	-3.8%
Gross Profit Margin	26.3%	27.5%		25.9%	26.6%
Operating Profit Margin	11.7%	13.5%		11.2%	12.3%
Net Income Margin	9.7%	9.3%		9.2%	10.2%
EBITDA Margin	26.3%	29.9%		25.5%	27.2%

From the table above shows that although Net Revenues still fell 5.3% y-y, but the short-term trend showed improvement, as indicated by the growth of Net Revenues by 2.5% q-q in 2Q18.

Unfortunately, Gross Profit and EBITDA is still decreasing both in terms of y-y and q-q. According to management, this is caused by:

1. Very low utilization rates in areas outside Greater Jakarta.
2. Increase in spare-parts costs due to the weakening of IDR.

It may indeed be a little too early to conclude that Net Revenues in 2Q18 is the beginning of a turnaround. However, I will take this as a positive signal, especially considering that in 2Q18 there was Lebaran, which generally reduced the company’s revenue.

Current operating fleet for regular taxi is around 16k. So the utilization rate is around 70%. If we assume that the utility ratio can increase to 80% (which ever happened in the past) in 2H18, then it is likely that the company can record Net Revenues of IDR 2.25 trillion. And assuming we take the worst margins in the table above (2Q18 margins), the 2H18 projection is as follows:

	2H18	FY18
Net Revenues	2,252	4,223
Direct Costs	-1,669	-3,123
Gross Profit	583	1,101
Operating Expense	-331	-618
Operating Income	252	483
EBT
Net Income	207	399
EBITDA	574	1,093
Gross Profit Margin	25.9%	26.10%
Operating Profit Margin	11.2%	11.45%
Net Income Margin	9.2%	9.45%
EBITDA Margin	25.5%	25.90%

With a fairly conservative assumption, it is estimated that BIRD can make EBITDA IDR 1,093 billion and Net Profit of IDR 399 billion in 2018. Thus, market consensus on FY18 net profit still seems too high.

The Risk

Governance risk.

When the IPO was first held, there was an internal feud within the BIRD owner’s family. Even though the case seems to have ended at this time, we can’t rule out the possibility of the emergence of such noises in the future. 

Competition risk.

Although currently the competition in the taxi business has eased somewhat, it could be that competition is still tight in the medium term.

Valuation

With IDR 6,380 billion market cap, and a cash position of IDR 511 bio and total debt of IDR 654 bio in 1H18, the enterprise value of BIRD is IDR 6,599 bio.

At present, BIRD no longer has similar competitors in JCI. However, we can make comparisons with its historical valuations:

	2014	2015	2016	2017	Average	Present
P/E	28.05	24.41	12.97	20.27	21.43	15.99
EV/EBITDA	15.03	12.77	6.69	7.60	10.52	6.04

As well as comparison with similar competitors abroad:

	BIRD IJ	CD SP
P/E18	15.99	16.81
EV/EBITDA18	6.04	6.48

CD SP is ComfortDelGro, a land transportation (mostly taxi) services company, based in Singapore.

Both BIRD IJ and CD SP have a similar market cap, and both enter the same business cycle. The taxi market in Singapore is even tighter and more competitive while in Indonesia is still under-penetrated. Yet, CD SP has a higher valuation.

When compared with its historical valuations, BIRD valuations are currently in a relatively inexpensive position.

But when compared to similar competitors abroad, BIRD only trades with a small discount.

Taxi business conditions have changed compared to the past. So, it seems inappropriate if we use past valuations as a benchmark.

If we apply the same valuation as CD SP, then the fair price of BIRD is in the range of IDR 2,680 – 2,830/share. The midpoint is IDR 2,755/share, or 8% upside from current level.

Conclusion

Decreasing the price of BIRD shares, at first glance it seems tempting.

Negative market expectations for the taxi business are driving BIRD valuation to an attractive level.

Reflecting on what is happening in other countries, I believe the taxi industry is experiencing consolidation, not death.

By using a fairly conservative assumptions, I expect BIRD can make EBITDA IDR 1,093 billion and Net Profit of IDR 399 billion in 2018. Therefore, BIRD is currently trading at a slight discount against its historical valuation and its competitors.
However, 8% upside potential until the end of year is not attractive enough for BIRD to be considered an attractive investment opportunity.

Three things must happen so that BIRD becomes attractive as an investment:

1. Further decline in stock prices.
2. Better operational performance.
3. Consensus' numbers on BIRD must go down.

The fact that the market still expects BIRD to book 480 bio profits in 2018 indicates that BIRD share prices can still be depressed in the near term. However, markets can simply ignore BIRD's operational and financial performance in the short term, and focus on long-term turnaround efforts.

Disclaimer: This article is not a recommendation to conduct transactions on the intended securities. Any consequences arising from this writing are beyond the responsibility of the author.

Is ERAA cheap?

P/E, P/E and P/E ...

That's the most common valuation method I've heard lately.

For the layman, P/E stands for price to earnings ratio.

This ratio compares stock prices per share, with earnings per share of a company.

In other forms, P/E is identic to the market cap of net income.

In the current bull market period, many stocks have become expensive.

Having tired of searching for bargains in blue chip stocks without fruition, the market started moving downwards, looking for stocks that have relatively cheap valuations.

This is a normal phenomenon at the peak of the bull market.

And because the world's economic conditions are indeed relatively good, the company's earnings are inclined to grow up.

This makes the P/E valuation method popular in the bull market.

The market focuses on E. To be exact, the potential E.

And why not?

In addition to P/E looks tempting when the E trend is rising, this valuation method also the most easy to use.

You just compare the stock price you buy, with the potential EPS that you will get.

If playing stocks is as easy as this, poverty in the world has long gone. 

One of the investment ideas that surfaced at the moment is ERAA IJ.

ERAA distributes and retails cellular telephones. The company is licensed to distribute international brands of cell phones, and operates a chain of retail shops in Indonesia.

The company is majority owned by PT Eralink International (59.97%).

When the majority of liquid-stocks are valued in the range of mid-teens, at a glance ERAA does look cheap. Analysts predict ERAA may book a net profit of IDR 358 bio by the end of 2018, thus at current price (IDR 1,295) ERAA is trading at 10.46x E18.

However, is ERAA really cheap?

The main mistake of the market, often is too simplistic.

In the case of ERAA IJ, markets tend to focus on P/E only and simply justify that ERAA is cheap.

However, I see some disadvantages of using the P / E method:

1. In contrast to assets, earnings are fleeting. Lots of variables that can affect earnings. This causes the valuation method to use earnings to be less certain.
2. Let’s say the market has been able to guess the 2018 net income accurately, will this earnings survive or even grow in the years to come? Because otherwise the market will soon penalize the company’s stock price that experienced negative growth (especially if the stock price has flown before). Therefore, I believe, an investor should not invest only based on short-term earnings.
3. Comparing the value of a company without taking into account its capital structure is a mistake, in my view. In fact, market cap is not the most accurate measure of company value.

The current market cap ERAA is IDR 3.74 T. With projected net profit 2018 of IDR 358 bio, ERAA is trading at 10.46x E18. However, ERAA has a total debt of IDR 1.75T.

After taking into account its capital structure, the company’s real value is IDR 5.20 T, not IDR 3.74 T.

And if you divide ERAA’s real value with its earnings estimate 2018, then ERAA shares are trading at 14.54x its earning.

And if you compare ERAA's real value with a 2018 cash profit projection of IDR 699 bio, you'll get a 7.43x score. Not too expensive, but not cheap.

However, ERAA's cash profit is rather strange, because consistently, the number is very different from its operating cash flow.

Operating cash flows that are highly fluctuating and different from cash profit indicate that ERAA's accounting earnings are low quality. This may be due to poor management of working capital, or the nature of the business. Up here, an investor should know that he/she can not rely on accounting profit solely in determining the cheapness of ERAA stock price.

It would be very difficult to guess the cash flow of ERAA in the future. Therefore analysts also do not include P/CF projections in Bloomberg, let alone calculate the free cash flow (FCF) of ERAA.

With the poor cash flow trend of the past, I doubt the company can produce identical free cash flow with its net income. The most likely possibility, ERAA’s free cash flow will be less than the reported net income. This makes FCF yield ERAA small, which means ERAA will appear more expensive when viewed from the FCF yield method.

	P/E18	PBV18	EV/NP18	EV/cash profit	FCF yield
ERAA	10.46	0.98	14.54	7.43	< 6.88%

	5Y P/E	5Y PBV
ERAA	9.90	1.00

From the two tables above you can see, by P/E and PBV, ERAA has been traded on its average 5 year valuation.

With poor working capital management, huge debt and rather high valuation (from various method), I did not find ERAA cheap.
Of course I can be wrong. A stock can go up for different reasons. But at current levels, it is not attractive enough to buy, in my view. With low-quality accounting profit, ERAA is indeed worth trading with discount, not par with the market. 

Disclaimer: This article is not a recommendation to conduct transactions on the intended securities. Any consequences arising from this writing are beyond the responsibility of the author.