Last year when I did not consider EVA much, I was tempted to add this stock into my portfolio. I thought it was good to have a company that sells rice. By sheer luck, I did not do it. Now that it has been in a downtrend, I thought selling rice is not actually an attractive business as it would have tight competition. Let's see what EVA has to say.
First, it is important to note that I only have 2 years of EVA data, since it just went IPO in mid-2017. What EVA tells me is simple: HOKI is able to generate positive EVA for two consecutive years and increasing it in 2018. It turns out, selling rice is still a profitable business, at least for HOKI.
HOKI was doing a great job in 2018. EVA went up from IDR 15 Billion in 2017 to IDR 38 Billion in 2018. EVA growth, adjusted to sales, was 1.9% (EVA momentum). That is fantastic. The major reason for this increase was an improvement in productivity, and not so much by growth despite its sales growth of 18%. This improvement in productivity, in turn, was due to better NOPAT margin, or to be more specific, because HOKI was able to get a deal on selling cost. This is why EVA margin increased from 1.2% in 2017 to 2.7% in 2018. Similarly, ROIC also increased from 16.3% in 2017 to 19.3% in 2018.
This is all well and good, and you might now ask: " So why is it in the downtrend now?" In my view, there is nothing prophetic about this. We just need to ask what are the expectations embedded in the share price. Remember, a good company might not be a good investment. This is because of the expectation mechanism. This is one major reason why EVA is a much better performance measure. EVA is very conveniently able to link performance with value and its expectations in the market.
As the table says, at its peak in 2018, 65% of market value is dependent on the future growth of EVA, which sums up to IDR 1,604 Billion. That is a lot and too optimistic given that realistically speaking, HOKI was only able to score EVA of IDR 38 Billion in 2018 which sums up to NPV of IDR 319 Billion without growth assumption.
To put it another way, back in 2018, the share price went to IDR 1,000/share or market value of IDR 2,450 Billion. HOKI's last performance was IDR 15 Billion in EVA. To meet shareholders' expectation that is implied in the share price of IDR 1,000/share, HOKI needs to increase EVA from IDR 15 Billion to IDR 282 Billion 5 years later. That is a growth level, adjusted to sales, of 4.4% a year for the next five years. To give you a perspective of how big 4.4% is, a global database from EVA Dimensions says that most companies could only get EVA momentum of 0.5%/year in 5 years time. And now we know that 2018 was very good to HOKI, and its EVA momentum was 1.9%. All of that information is all that I need to know to say that back in 2018, HOKI's share price was overvalued. I firmly believe investors would be better off thinking overvaluation in that kind of sense, rather than relying on some magic numbers where it is impossible to tie it to how much value the business is creating.
How about now? At the current price of IDR 690/share, investors are expecting EVA momentum of 1.6%/year on average for the next five years before going flat. A spreadsheet and some modeling skills are required, by the way, to calculate this number. Is it too high? Granted, HOKI was able to pull EVA momentum of 1.9% last year. It is your job, dear readers, to think if it is achievable. My guess is, it is not. I really suspect that last year performance was a one-time event, something that even the management was not expecting. It was too good to be true.
As a consideration, management expected a net income growth is to be around 14%. That 88% net income growth last year was due to an unexpected widening in net margin from 4% to 6%. With a bit of simple math, we could calculate that a net income growth of 15% this year would require revenue growth of 22% if net margin stabilizes at 6% like last year (a net margin of 4% would require a revenue growth that is ridiculous). Most analysts would stop here, but we could do much better after knowing that the market currently is expecting EVA momentum of 1.6% per year.
How much EVA margin improvement would it take? EVA margin would need to increase to 3.5% this year from 2.7% last year, so that EVA momentum would hit 1.6%, assuming revenue growth of 22%. It also means ROIC would need to increase from 19.3% to 20.8%. That is a powerful calculation if I say so myself. There is no way you could derive market expectation into real performance target so clearly without thinking in terms of EVA first. Now, is the increase of ROIC or EVA margin of that scale is possible? At any rate, even if the market is right, and HOKI is fairly valued, management needs to hit EVA momentum beyond 1.6% to drive the share price higher.
Whichever I look at it, this stock is tough because you need to predict that management needs to do, not just good, but awesome. Being good is not good enough in this case. For what its worth, I would rather choose an easier stock.
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