This is a prime example of how basic financial analysis that most people do is impotent to give you desirable understanding of the company and its stock price at any level.
Here are some incredible facts about MMLP which understandably encourage people to view it as attractive, especially in recent times.
First, its net income is pretty good. This year is down a bit, but people are understandably could feel more optimistic because its revenue keeps climbing higher.
Stories abound about how COVID-19 accelerates e-commerce, which requires more warehouses. And MMLP is the guy who owns warehouses.
Let’s add one or two more spices: MMLP has a consistent gross margin of 90%! Its net margin also comes close. MMLP gross margin is the highest among Indonesian companies I have seen so far.
And moreover, since nowadays everyone seems edgy about debt, well, more good news: MMLP has very little debt. Only 13% of its net assets is financed by debt, or it has DER of only 0,1.
With this so much goodness, how could it go wrong? Look at its price chart.
And you are left with thinking: ‘the market must be an idiot.’
How else could you explain the fact that its share price since IPO has declined 86%??
It must be that, or you must be wrong spectacularly about something.
Let’s try this again one more time. This time let EVA tells you the story.
Voila! MMLP is not only a spectacularly EVA negative company, it is also consistently getting worse.
Now, which one do you think tells you the truth? Revenue, gross margin, net income..or EVA? I suggest starting with the idea that in a lot of time, Mr. Market could see through.
It is really fascinating that I have rarely met or read analysts covering Indonesian stocks who understand EVA (economic profit) and calculate it properly...let alone make a clear connection with share prices in his/her drawing board. And yet, EVA has never failed to show me the real driver of a company’s share price, and its real overall condition as I have documented here in EVA Brief.
A large part of MMLP distortion is caused because most of MMLP assets are financed by shareholders. In the accountant world, shareholders’ fund effectively has 0% interest rates. You don’t assume that money from shareholders is free money, and say you are profitable. Another significant distortion comes from accountants’ obsession to calculate the ‘fair value’ of an asset. So, when a property is deemed to have higher value (because of rising prices), accountants write it as a gain, although there is no change in cash.
The biggest risk MMLP investors face right now is not only EVA is in downtrend, but also more importantly, there is almost 0% chance that it could even become a zero NPV company or wealth neutral. There is no point in continuing a business if it could not generate at least zero NPV. I am certain that if a lot of MMLP assets are financed by debt, it will be under severe pressure of bankruptcy right now.
The situation right now is possible because people think shareholders’ money is free. It is not. It is standing on a ticking bomb.
The severity of MMLP as a wealth destroyer is much better shown by EVA margin than ROIC. In fact, ROIC gives a much more optimistic view simply because its NOPAT is positive. But that does not tell how far it is for MMLP to become a wealth neutral (a company without added value). Here is MMLP economic profit margin.
A zero NPV company has 0% EVA margin. If you want to invest in this company, you’d better have a very good reason why MMLP EVA margin could eventually rise to at least near 0%. It has never been there before and I am convinced it could not do so.
EVA margin break-down makes it possible to compare the trade-off between operating margin and asset efficiency on an apple to apple basis. MMLP EVA margin is a nightmare because that tremendous 90% gross margin is still far from compensating its assets which are mostly funded by shareholders.
If you think that the rise of e-commerce will save the day, you’re suggesting that MMLP revenue would be boosted.
Let’s run that scenario. How much revenue has to grow to make MMLP a value neutral (0 EVA; 0 NPV)?
Short answer, its revenue has to quadruple to IDR 1,5 T from currently IDR 365 Billion. That is a rate of growth of 33% for the next 5 years, or 15% if it could maintain that growth for 10 years.
But that’s not all. MMLP has to be able to grow that much without investing more in its fixed assets. Historically, it has never done that.
In short, in order to finally become a zero NPV company, its revenue has to quadruple without making new warehouses. It is highly improbable.
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