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.