2018 was really good. Usually it gets better after Q1, but later I would show why it is likely the lever to further EVA improvement is not in the table.
EVA growth is mostly driven by changes in EVA margin (productivity gain), not growth.
Important to add: Absent of productivity gain, a 10% revenue growth like last year is only adding to 0.3% of EVA momentum.
EVA margin, in turn, is driven mostly by NOPAT margin
It makes Gross Margin to be the key lever for value
Low chicken price for more than half a year means EVA margin decline this year is in sight. This is what EVA would possibly look like in 2019. Just a bit softer than Q1...
Let’s talk about market expectation now. Let me start with how much value the market assigns above CPIN invested capital, or MVA in short.
Textbook EVA-MVA (by extension, market value) relationship. It seems like expectation is in the direction of actual EVA performance.
Let’s look deeper. It turns out expectation was excessive at the top in 2018. It is still high at current level.
Certainly, the market is expecting lower than last year real EVA growth performance, but....
This one will make it very clear. This is what EVA projection looks like according to market expectation vs a more realistic (at least to me) projection, also what I call an EVA-friendly projection. I know price has been falling lately, but...
At IDR 5,300/share, the market is expecting EVA to grow from IDR 2.3 T last year to IDR 9.3 T in 2023. I don’t expect much. I see the lever to value is very limited and would work backward at least in this year. Hence, EVA would only grow from IDR 2.3 T to IDR 2.7 T in 2023.
Well now, for the fun of it, here is what the market expected at its peak just some months ago. EVA is expected going from IDR 2.3 T in 2018 to the moon of IDR 18 T in 2023. Forget about history.
If you work through these numbers, you would know that it takes a drastic, I mean really drastic, changes in Indonesian chicken market to justify its peak at IDR 8,800/share (and I would argue even for current price). But then again, a stock is an investment because there are expectations. Just make sure to not let get ourselves suckered.
To remind you, in deriving these market expectations, there is not much crystal ball playing here. With EVA framework, we have very clear boundaries. You should remember that,
Market Value = Invested Capital + MVA
Because market value and invested capital are known, then it is a simple matter to derive MVA. For instance, at current price of IDR 5,300/share, CPIN market value is IDR 90 T (IDR 87 T of equity value plus IDR 4.9 T of debt value minus IDR 2.2 T of excess cash). Its invested capital is IDR 23 T. That means its MVA is IDR 67 T (IDR 90 T minus IDR 23 T). That’s what the market is saying about CPIN value creation. Now, you should remember too that,
MVA (or NPV) = Present Value of EVA
That means future projected EVA must sum to IDR 66.7 T. It then becomes up to the analyst to choose how to dissect IDR 66.7 T to give additional insights. But, current price dictates that EVA must sum to IDR 66.7 T. To repeat, that IDR 66.7 T (MVA) is dictated by the market, not by the analyst. In addition, value is anchored by invested capital which makes it clear whether a company is a wealth destroyer or creator. On the other hand, value is buried in terminal calculation with free cash flow. These are 2 major reasons why it is much better for investors to favor EVA instead of free cash flow.
Normally, I do not disclose target price or any of the sort here. But let’s make this a bit of an exception. An EVA-friendly (my projection) scenario would give Enterprise Value of IDR 47.6 T, or equity price per share of around IDR 2,600. Incidentally, there is a good support there. But, investors tend to exhibit collective behavior which gives rise to cycle of optimism-pessimism. I do not see pessimists expectations here at current price, and for the record, the EVA-friendly projection is by no means a pessimistic view.
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