The disruptive economy right before your eyes

After exhausted reading the research report and hearing market gossip for a full week, I spent the weekend at home watching my new smart TV.

I am very impressed with the increasingly sophisticated TV technology, but with a relatively cheaper price.

Ten years ago, you have to spend IDR 15 mio just to get a regular LCD TV, while now you can get a LED smart TV with half price.

After quite tired of waiting for my kids watching Pink Fonk, and deaf to hear the song “Baby Shark”, I finally got a chance to try my new TV.

Our choice fell to the “Baby Driver” movie.

We chose the film on the website: www.bioskopkeren.com

Fascinated by the excellent image quality and beauty of Lily James, I was finally surprised by the reality.

That is, actually what is in front of my eyes, the example of disruptive economy that actually happened. 

I realized that since my TV got home, we hardly ever watched regular TV channels.

We as consumers, prefer the ability to choose.

Even our kids prefer the video options available on Youtube rather than Disney channels.

This really made me think about the existence of the pay-free TV industry in Indonesia: will the pay-free TV industry will survive in the future? Does the current stock price reflect existing threats?

The above data is the revenue data of 3 TV companies in Indonesia. Although not entirely complete, the above data reflect the large industrial market share.

In the last 5 years, there seems to be no problem with the growth of this industry. The trend of industrial income is still growing.

However, the potential for future growth is somewhat dubious, because:

1. In the short term, the world’s consumer companies to cut their marketing spending worldwide. The announcement was made solely by major companies such as UNVR, P&G and confirmed by the advertising giant, WPP.
2. Sir Martin Sorrell, WPP’ Chief Executive also said: “The digital disruption is a fundamental one”. A very clear second factor is the long-term trend of changing the way advertisers go digital.

With these short and long-term challenges, it is highly probable that the TV media companies will face many headwinds to grow its revenue in the future. What happens abroad, sooner or later will arrive also to Indonesia.

Currently, the top 3 media companies market share looks like this:

Clearly MNCN market share appears to be falling, while SCMA is stable while MDIA is increasing sharply.

However, in terms of margin, SCMA has decreased a lot, while the other two stagnated or slightly increased:

The margin decrease trend followed a decrease in ROE on SCMA and MNCN.

Of these three companies, it seems clear that SCMA performance looks most dubious.

I am very anxious with SCMA’ ROE decline that has lasted for 5 years in a row.

Usually this sustained decrease signifies a structural problem.

And it seems the market agrees with my view on this:

From the chart above you can see the SCMA’ ROE as a leading indicator of stock price.

And it seems that the downward trend in ROE will continue with less revenue from customers, changes in advertising technology and tight competition.

Which makes me think that judging stock prices based on the level of SCMA valuation in the past is a mistake.

Below is a valuation table based on price to book value:

Stock	2012	2013	2014	2015	2016	Avg.
SCMA IJ	12.40	9.60	17.68	13.15	13.71	13.31
MNCN IJ	4.73	5.64	5.09	3.46	3.06	4.40
MDIA IJ			10.14	9.19	6.74	8.69

Although SCMA is currently trading at 8x book value (lower than historical average), but from P/E side, SCMA is trading at 19x E17, a level that is above the market average. And do not forget the SCMA’ ROE is in a downward trend, which means that SCMA is indeed worth trading at a lower book value.

With the industry map already changing, it is rather difficult to guess the proper level of valuation for SCMA. Comparison with similar companies abroad can be done, but I am not sure about the similarity of SCMA business model with companies abroad.

With a rather opaque outlook, coupled with SCMA problems that still continue to occur, it seems wiser to avoid this stock for a while.

A market that is too focused on the short term, may be enthusiastic about seeing improved audience share data. But I believe it is an approach that listens to short-term noises only. By doing so, market focus on the data volatility rather than firm’ fundamentals in the long run.

I believe in what I saw in the weekend, that what appears before my eyes, is a form of disruptive economy that is underway in Indonesia. This process happens faster than disruptive economy in other sectors.
Underweight SCMA.

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.

Why I think EM should be trading at discount (2)

Acacia Mining PLC (ACA LN): a waiting game.

If you think you have hedged against the current uncertain market situation by buying gold mining stocks, you should not be too excited first.

At least that is what some Acacia Mining PLC (ACA LN) investors feel.

Indeed, in the past, ACA LN share price movement is very similar to the movement of gold prices:

In fact, the correlation of both reached 0.944 over the last 5 years.

However, the harmonious relationship between the price of gold and ACA LN shares was destroyed at about the end of May17 (see the green arrow in the graph below).

Instead of getting a hedge, ACA LN investors get an additional risk: political and legal uncertainty risk.

ACA LN is primarily engaged in the business of mining, processing and sale of gold, copper and silver in Tanzania. Tanzania is an East African country known for its vast wilderness areas.

I find it difficult to find the Tanzanian category in the investment world, but I believe the status of Tanzania is closer to the frontier market rather than emerging market. Which means that structurally, Tanzanian is even more risky when compared to other emerging market countries.

ACA LN is actually a foreign company operating in Tanzania. The majority owner is Canada based Barrick Gold, a largest gold mining company in the world.

The company has 3 operating mines located in Tanzania. The company’s segments are North Mara, Bulyanhulu and Buzwagi gold mines.

The North Mara gold deposits are situated in the Mara Musoma greenstone belt. It is a combined open pit and underground operation from two deposits, Gokona (underground) and Nyabirama (open pit).

The Bulyanhulu is a narrow-vein gold mine containing gold, silver and copper mineralization in sulfides.
The Buzwagi is a shear-hosted quartz-veined deposit, hosted in porphyritic granite. The Buzwagi mine is a low grade bulk deposit with a single large open pit. It also has a portfolio of exploration projects located across Africa.

ACA LN’ overall reserve and resource base of 27.5 mio ounces is one of the largest asset bases in Africa. Although ACA LN has reserves of gold, copper and silver, but until now the production and sales of ACA LN consists of only gold.

While the company’s revenue depends on the price of gold, but in terms of production, which in fact is a factor that is more controlled by the company, the ACA LN shows stability.

With a cash cost of USD 600/oz, ACA LN is one of the most efficient gold producers.

However, all of sudden, the president of Tanzania, John Magufuli banned the export of unprocessed ores in Mar17 as part of a plan to promote the development of domestic smelting. Tanzania also accused ACA LN of operating illegally. As a result, ACA LN was served with USD 190 bio bill unpaid taxes, penalties and interest accumulated over the past 17 years.

ACA has denied the charges. ACA LN claims to have invested more than USD 4 bio in Tanzania over the past 20 years and operates 3 mines in the country.

In essence, Mr. Magufuli’ action is a form of asset nationalization movement.

In my view, there are several reasons why a country would take such repressive action:

• The country wants to regain their assets fully.
• The government wants to replace their business partner.
• The government wants to get more profit sharing either in the form of taxes, investments or the absorption of more local labor.

For the first reason, it could happen but the chances are small. There is no advantage of expelling foreign money. Tanzania can learn from North Korea, how it feels the country has no business cooperation with others. Furthermore, I doubt Tanzanian government and its private companies have sufficient funds and expertise needed to manage their assets independently.

For the second reasons, it may happen. But if you think further, which investors are willing to invest after the government slaughter ACA LN?

Of the three, the last reason is the most plausible. Which means the Tanzanian government and ACA LN must sit together to discuss the issue.

Regardless of the government’s angry reaction, the Tanzanian government’s demands are far-fetched.

To put things into perspective, USD 190 bio bill is equal to 190x ACA LN’ revenue in 2016 or 100x ACA LN market cap. Even Barrick Gold’ market cap – which is the parent of ACA and the world’s largest gold company – is just USD 18.62 bio or about 10% of the total bill being put on hold.

Therefore, the request of the Tanzanian government is clearly unreasonable.

But, absurd as it may sound, the damage is already happening.

This turmoil has resulted in ACA LN losing 67% of market cap from its highest point last year. While in the same period, the price of gold rose 8%.

At a price of GBp 181.80, ACA LN is trading at 0.5x BV whereas in the past ACA LN was on average trading in the range of 1x BV and the median of similar companies is 1.35x.

ACA’ financial condition is also very healthy, with total liabilities only USD 629 mio while cash and equity of USD 176 mio and USD 1,891 mio respectively. However, I predict the cash portion will decrease rapidly due to this scandal.

Investors who had thought of getting cheap stock now can only bite their fingers. By buying these shares, they are not investing, but hoping. They hope the president of Magufuli is just joking.
The future of the ACA LN relies heavily on the outcome of the company’s negotiations with the Tanzanian government, which in fact is not known when it will finish.

This case should open the eyes of investors to the political and law uncertainty risks that can occur in developing countries like Tanzania.
At 0.5x BV, the risk-reward ratio is not attractive enough. If investors should demand a higher margin-of-safety on firms in emerging markets, investors should instead insist on huge margin-of-safety for companies in or who have exposure to frontier markets. 

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.

Why I think EM should be trading at discount (1)

The conviction of the former head of Greek statistics a few months ago should open the eyes of global investors to the risk of emerging markets (EM) economic data.

Mr. Andreas Georgiou is accused of being difficult to work with, and presents economic data without negotiation and approval from the Greek government.

The creditors and academics criticize the actions of the Greek government that punish Mr. Georgiou because Greece is considered to have blamed Mr. Georgiou solely for the errors of economic policy taken by the New Democracy party.

Investors should be aware, that events occurring in Greece can occur in any country. Especially in developing countries or emerging markets. Therefore, investors should examine more deeply the economic data presented by the government.

In my opinion, at least there are some things that make economic data in developing countries become less valid.

The first is the lack of supporting economic data devices. The process of collecting data to get accurate output is a tiring and costly job, especially in some countries that have more challenging conditions. A country needs to equip and finance this data collection process well. And this of course requires a lot of money. If the government is not seriously committed in this matter, do not rule out the possibility that the economic data presented is not accurate.

The second is the government’s deliberate intent, for the sake of demonstrating successful government performance so that the governance can be re-elected.

The third is the absence of counter-institution that verify the accuracy of the data presented by the government. For some cases in developed countries, many institutions are developing statistical calculation methods for their own purposes. Inaccurate data from government can be detected through inconsistencies with other data measured by other institutions. The presence of rich institutions in developed countries (hedge funds, brokers, etc) allows for such a process of re-examination.

Government economic data is very important, because it is often used as a reference for business and investment decisions. Although it is impossible to present 100% accurate economic data, at least the margin of error should be kept as small as possible.
Some examples of consequences of economic data inaccuracy are:

• The occurrence of wrong economic decisions. For example: if the inflation data presented by the government is much lower than the reality, then the workers will suffer because the salary adjustment is much lower than real inflation, which means their purchasing power slumped.
• The price of assets is wrong. Because the inflation data presented is low, the risk-free-assets yield is low. This risk-free-assets yield is the benchmark for other assets, including the price of corporate bonds and stocks. Artificial inflation data leads to high overall asset prices, and can trigger an assets bubble in the long term.

I am not suggesting that investors do not trust all EM economic data, but for investors to see EM economic data with a grain of salt. For those who are smart will carefully analyze the data before making economic decisions. In some countries, adjustments to the data are still required. Alternatively, investors should demand a higher margin of safety. 

To check the status of countries, you can start from: https://en.wikipedia.org/wiki/Emerging_markets

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.

BISI: what we can learn from Russia

After the EU and US imposed sanctions on some Russian businesses following the country’s invasion of Ukraine and annexation of Crimea in 2014, Moscow hit back with sweeping bans on western food imports.

Overnight, about 60% of the country’s total meat and fish imports were banned, and 50% of dairy, vegetable and fruit imports – creating a huge opportunity for domestic producers. Total food imports from the EU fell 40% between 2013 – 2016.

However, instead of collapsing, Russia’s economy is now driven by the revival of its agricultural sector. Around Russia, farms, fields, greenhouses and fertilizer factories are thriving as consumers turn to domestically-produced food, helped by the worst relations between Moscow and the west for a generation.

Russian Aquaculture produced 664% more fish in the 1H17, year-on-year, and recently opened a new 1,500 tonne fish farm, as part of plans to double its fish stocks over the next year. Meanwhile, sales at Rusagro, the country’s largest agriculture company, rose 16% in 2016 compared with the year before, including a 49% increase in sales of crops such as wheat and corn. Wheat production at Steppe, a company owned by conglomerate Sistema, grew 80% last year.

As a result, shares in Rusagro, PhosAgro and meat producer Cherkizovo have more than doubled since 2014. Russian Aquaculture’s have quadrupled.

What lessons can we learn from this incident in Russia?

Well, if you notice, there are similarities in the agribusiness sector situation in Russia and Indonesia at this time. Especially in the corn business in Indonesia. Perhaps the impact will not be exactly the same, but the degree of similarities seems high.

The Indonesian government since the beginning of 2017 has banned the import of maize and instead launched a national movement to grow corn. It aims to reduce imports, empower local farmers and achieve food self-sufficiency.

As a result, already predictable, the current market price of corn in Indonesia reaches IDR 4,500/kg, well above the imported corn price of only IDR 3,500/kg. This certainly makes local farmers more excited to grow corn.

The impact is very clear: it is likely that corn farmers and corn seed sellers will benefit.
That's why I started to glance at a company called PT Bisi International Tbk (BISI).

BISI has been established since 1983 by the Jiaravanon family (CPIN group).

BISI and its subsidiaries manage their business across four major segments: hybrid corn seeds, vegetable & fruit seeds, hybrid paddy seeds, and pesticides & fertilizer. Producing high quality hybrid seeds has been the company’s core business over the years with hybrid corn seed as its main focus. The revenue from the sale of seeds made up 62% of the company’s revenue in 2016, with corn seed as the highest individual contributor at 44%.

BISI has been partnering with Monsanto to import Monsanto’s grandparent seed to Indonesia. The imported seed provide BISI with the highest quality breeder corn seed with highest yield traits.

For seed business, seed production process begins with imported grandfather seeds, which will then be mated with local grandfather seeds to obtain the desired seed quality. The process undertaken in the R&D department produces what is called a foundation seed. The foundation seed is then propagated through a partnership program with local farmers, whereas the company will provide foundation seeds to the farmer for planting with the agreement that the contract farmers must sell all the harvested crops to the company at market prices. The harvests received from these partner farmers are called commercial feeds, which will then be selected, dried and packed, to be sold as seeds to farmers.

The company currently has 60,000 farmer partners, but has only 70,000 tons of capacity for the manufacturing (selecting, drying and packaging) process. The current utilization ratio is 70%.

BISI continuously produces new hybrid seed varieties and introduce up to three new varieties each year to maintain its quality and market share.

Based on data from Ministry of Agriculture (MoA), BISI’s seeds are proven to have higher yield and more resistant to pests and diseases.

For pesticide & fertilizer business, the company imports 80% of raw material needs, which will then be combined with 20% of local materials. The company has pesticide production capability of 15,000 tons, with utility ratio of 80%.

BISI’ sales trend over the last 10 years tends to be stable and slightly up. The year 2008 was a good exceptional year, at which time BISI received a huge windfall from purchasing seeds by the government, which did not happen again in the following year. For 2017, BISI is targeting a 30% y-y sales growth or equivalent to IDR 2.4T.

The pattern of  net income changes tend to follow changes in sales, with the exception in 2011 and 2013. The decrease in net profit in 2011 was due to an increase in operating expenses, while in 2013 was due to higher COGS and also FX loss.

Gross margin and net profit margin fluctuated slightly over the past 10 years, with an average margin of 43% and 16% respectively.

Costs that must be considered is COGS, which is specifically the cost of raw material used and factory overhead. Both account for 36.31% and 13.94% of 2016 total sales, respectively. Raw material used here is the purchase of commercial feeds from partner farmers, whose prices depend on market prices.

For 2017, BISI is targeting +42% y-y net profit growth, or equivalent of IDR 480bio.

I see BISI’s incomes target is quite reasonable considering there is still room at installed capacity.

The company is conservative enough to finance its growth, which appears through the low use of debt levels in the balance sheet. In fact, in the latest quarter (1Q17), the company is in a net cash position (cash of IDR 508 bio vs total liabilities of IDR 334 bio).

Recently the government through Ministry of Agriculture (MoA) has set a target to disburse up to 55k tons of corn seeds in 2017. As the industry leader, BISI should be able to enjoy economies of scale as it aims to continue supply 60% of the government’s free corn seeds needs (program Bantuan Benih). Another segment, namely pesticides & fertilizer, sales will tend to follow the increase in seed sales.

Admittedly, fundamentally BISI is not a superior company that has a “wide moat”. The profit margins trend are slightly down lately. Indeed, in the last 10 years, the company has only twice experienced a decline in annual sales, but there is 4 times decline in net income in the last 10 years. 

On the other side, I found the stock price of BISI is not expensive. Below is a comparison of BISI valuations with similar companies:

Company	P/E17	EV/EBIT17	PBV16	ROE16
BISI IJ	11.95	8.21	2.31	17.26
MON US	24.23	17.84	11.38	39.68
SYNN SW	25.09	5.02	19.72	14.41

Currently there are 4 local brokers who follow this stock, with an average price target of IDR 2,300/share.

Because BISI’ earning tends to be volatile, I personally prefer to set its target share price based on PBV, in relation with its ROE.

In the past 5 years, BISI’ stable ROE tends to increase slightly. Meanwhile, in the same period, BISI was traded on the range of 2.3x BV. Using the same multiply on BISI’ equity 2017, we will get a target share price of IDR 1,625/share.

But since BISI’ ROE is in up trend, let's round the number to 2.5x. By multiplying its 2017 equity with 2.5x, we will get the target price of IDR 1,750, which is still not very far from current target price (+19% upside potential).

I believe this price target is fair and conservative. With a solid financial position, supported by government’ program, and valuation that is not too expensive, I think BISI deserves further attention. The kicking of BISI shares from MSCI small cap a few months ago is also a good moment to collect its shares at low prices.

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.

BVS LN: House of Hope

The fall in the value of GBP because Brexit in the middle of last year led me to see stocks in the UK.

My thinking is the decline of GBP makes the value of assets in the UK relatively cheap than ever before.

But at that time I discovered that stock valuations in the UK are not very attractive.

Until I found Bovis Homes (BVS) in Feb17.

At that time, the decline in BVS share prices sounded an alarm to my ears.

BVS is a UK-based company, which is engaged in designing, building and sale of houses for both private customers and Registered Social Landlords. The company offers a portfolio of properties, including one bedroom apartments, two bedroom apartments, five bedroom apartments and six bedroom detached family homes. The company carries out and manages a range of housing development activities, including purchasing of the land, building of the houses and the after-care service for its customers. The company focuses on various activities, which include land acquisition, planning, legal, design, surveying, engineering, purchasing, construction, sales and marketing, public relations and customer service. The company works in partnership with house builders, local authorities, housing associations and other agencies. BVS operates throughout England, with an emphasis on the South and the Midlands and North West markets.

BVS stock prices fall after BVS announces a missed financial report from market forecasts. The company generated total revenue of GBP 1.05 bio pounds, an increase 11% y-y. Housing revenue was GBP 1.02 bio, or 12% y-y with average sales price increased by 10% y-y. However, pretax profit declined 3% y-y to GBP 154.7 mio, short of a Dec16 forecast range of GBP 165 mio. In addition, BVS, which delivered 3,977 homes in 2016, said it would slow production and lower completion target for this year in order to focus on customer service issues. BVS took a one-off charge of GBP 7 mio to cover follow up work, out of pocket expenses and compensation claims from customers.

Long story short, the company is being troubled by the bad products and raises many demands from its customers. On Feb 20, 2017, BVS lost a market cap of GBP 10.2 mio over a loss of GBP 7 mio consumer claims.

Despite all the woes experienced by this company, I found that the valuation of BVS is not expensive. At GBp 760, BVS traded at 1x BV16 and 8.47x E16 at that time. In addition, BVS’ balance sheet is very strong, in which the company has no interest-bearing debts. In my view, with such low valuations and a very strong balance sheet, BVS share is very attractive. But it was not just me who thought so. In April17, Redrow offers a price of GBp 814 for each BVS share, while Galliford Try offers GBp 886. Both compete for BVS to be combined. BVS boards, however, reject all the offers on the grounds that their proposed bid price does not reflect the true value of the BVS business. On the contrary, BVS is daring to recruit former chairman and CEO Galliford Try to become the new CEO of BVS. The board believes that an independent strategy under the leadership of new CEO will deliver greater value for shareholders. Greg Fitzgerald, who has worked for the Gilliford Try for over 30 years, has a qualified experience and is highly respected by the market. And with full confidence, he immediately bought BVS shares worth GBP 3.2 mio at GBp 922/share after being appointed as CEO.

After some time, last night BVS announced 1H17 financial statements under the leadership of the new CEO:

	1H17	1H16	y-y	% of achievement against target FY17
Revenue	427.80	412.80	+3.63%	45.20%
Gross profit	77.40	87.70	-11.74%
Operating profit	48.90	64.00	-23.59%
Net income	34.50	49.00	-29.59%	34.89%

At a glance, obviously there is nothing to be proud of in this way.

But strangely, BVS share rose 10.36% overnight after this report was announced. My guess is that the market has been too pessimistic about BVS prospects. The achievement of sales in 1H17 which is only 45.20% of the total target 2017 is quite inline if you see patterns in the past. The number of completed houses is only 1,512 units, a 5.6% drop y-y, but BVS is able to raise the average selling price by 9% y-y to GBP 277,000. Regarding the low profit achievement in 1H17, BVS has long communicated to the market that they are facing many compensation demands from unhappy consumers over the poor quality of the properties they buy and set aside GBP 3.5 mio to appease unhappy buyers over the period, on top of the GBP 7 mio already committed.

On the other hand, new CEO Greg Fitzgerald, who left retirement to take helm of BVS in Apr17, said BVS would now aim to deliver 4,000 homes every year. He also said the company would aim to grow its gross margin to 23.5% from 18% in the first half of the year. The company promised to return about GBP 180 mio to shareholders over the next three years as it scaled back its balance sheet by disposing of developments outside core geographic areas, lowering infrastructure spending and reducing its employee headcounts.

At the moment, BVS share price has reached GBp 1,161 or about 1.4x BV17. Whereas in the past decade, BVS shares traded in the range of 1.04x BV. Indeed, when compared historically, the price of BVS looks expensive.

But lately, property stock prices in the UK experienced rerating following the strong performance of property companies in UK. Currently Galliford Try is trading at 2.04x BV17 while Redrow is trading at 1.64x BV17.

But it must be admitted, unlike in the past, the current stock price reflects optimism for the performance of the new CEO. Investors should be cautious as further strengthening of stock prices requires successful execution of the CEO’s work plan. For those who are willing to wait, be welcome. For those who do not, there is no harm in taking profit. 

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.