Let's see how truly profitable a successful instant noodle business is.
It is remarkable. ICBP has managed not only creating wealth (as shown by positive EVA) but also has been steadily increasing it at a 3-year pace of EVA momentum (difference of EVA scaled by sales) of 0,7% on average annually. Consistent EVA growth is hard in any business, but ICBP has been doing that.
Another song of praise is in its true profitable margin, EVA margin. It is a measure that says how much the business economic profit is for each sale it makes. Its EVA margin has been near 7% for the past 3 years. That is very high. It's ranked 7th out of 50 companies that have been registered in my database so far. More than half (29) of the companies could not even generate positive EVA, and hence, negative EVA margin. It is not easy to create wealth.
Let's get back on EVA. You saw that ICBP EVA has been increasing. Why is that?
In recent times, ICBP value driver has changed from improvement in productivity (by increasing its EVA margin) to primarily dominated by sales growth.
On closer look, the key question that matters in terms of productivity (EVA margin) is: Can ICBP increase its gross margin even further?
I think that largely depends on the future price of its raw material: wheat.
Will wheat continue to go down? I think so. There is a negative reversal signal on my composite indicator (talking about technical analysis here).
However, since wheat price is already at a low enough level, I don't think further price decrease would change gross margin much.
Moreover, ICBP seems to be on an expansion path to drive more sales growth. That puts a burden on productivity because more assets mean the harder it gets to maintain high returns on capital.
In view as above, future EVA would likely to be supported only from growth, not an improvement from productivity.
That leaves the question of value to depend largely on future sales growth.
As the chart above says, ICBP revenue is looking good.
With the coronavirus fear button, people are stocking up instant noodles. Add that to recent flooding in Jakarta, there are good reasons to expect good sales growth this year.
An educated guess, I think sales growth could be 15% this year.
How much would that bring to EVA growth?
About 1,1% EVA momentum.
That growth would bring EVA from Q3 2019 (LTM) IDR 3 T to IDR 3,47 T by the end of this year (2020), assuming EVA margin stays the same.
That looks good.
So, how does that compare with what the market is expecting at the current price?
My reverse-engineered discounting process tells me that the market is effectively expecting ICBP to generate EVA momentum of 2,6% per year for the next 10 years to justify its share price of IDR 10.950/share.
It is almost guaranteed that ICBP could never meet that expectation. As I said, a realistic goal for ICBP would be around 1% EVA momentum. But in the world of stock investing, we need a rubber-band mental to interpret what the number means.
I believe that expectation is still within a reasonable zone. It should be expected that a persistent value creator is valued more optimistically than what it could realistically achieve.
Investors need to be extra vigilant when that expectation has become too high.
Strictly speaking, ICBP share price is hardly a discount right now. At best, it is 'reasonably priced'. For a company this good, my experience tells me that investors will take it too far which makes identifying a point of extreme optimism much easier. Right now, it does not look extreme.
To put it in terms of market moods as measured in Elliott Wave way, I think we are still far from the completion of the final fifth wave.
That is to say, we are only beginning to see the start of extreme optimism.
As a precaution, a major re-examination would be required if that trendline is broken.
Climate Awareness
Is there a live streaming of how much carbon in the atmosphere now? It turns out, there is. Introducing Bloomberg Carbon Clock. Our atmosphere now has almost 415 ppm CO2. There was a time when 400 ppm CO2 was considered as: Do not cross. We have already passed it. 450 ppm CO2 as Bloomberg pointed out, would almost surely breaks most, if not all "tipping points". Everyone should see it.
Watch:
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