There is a saying, if you want to predict the future, you need to (at least) understand the past.
Here is the long-term price chart of SIDO, starting from its IPO in late 2013.
SIDO fell really hard in 2014. More than 50% of its market value was wiped out. Why is that? It is too easy to disregard the past and brush it off as irrelevant. But I believe it holds the key to its future share price.
Could you tell what is wrong by looking at its performance?
Guess not...
But here is the thing. And this is big.
That impressive real performance is NOTHING compared to what is being expected by the market when SIDO share price was at its 2014 peak near IDR 910/share.
At that point, investors effectively expecting SIDO to grow its EVA from IDR 170 Billion in 2014 to IDR 2 Trillion in ten years. Expected EVA momentum was 8.3% per year. As it turns out, SIDO could only grow its EVA (adjusted with sales; i.e EVA momentum) at a pace less than 1% in 2015.
Expectation matters. A lot.
Being able to see fundamental reality is only half of the job. In 2014, the expectation is what you would call excessive optimism. Although EVA continued to grow, it is only a matter of time before its share price collapses.
That is the background story of what is happening right now. We are now on that path of excessive optimism.
What is the expected EVA momentum at current share price (IDR 1.240/share)?
7%. On its way to meet 2014 expectation level.
Which brings us to the next important question: Is this time different?
Yes, some things have fundamentally changed recently.
I mean the recent real performance was really good. Its EVA grew significantly faster in 2018 and 2019 as you just saw in the first chart. We need to understand why that is so.
As you can see below, the recent EVA growth was largely due to an improvement in productivity. And by productivity, I mean EVA margin.
EVA margin increased from 10% (which is already very good) in 2017 to an incredible 16,8% in 2019. According to my database of 50 stocks, that makes Sidomuncul beats Unilever in terms of economic margin, which is the highest in Indonesian companies (excluding financials). This is very big.
The key reason why SIDO managed to do that is by focusing more on selling herbal medicine which is its highest margin segment.
With coronavirus, it is reasonable to expect people would increase their uptakes of herbal medicine.
What does it mean for EVA prospects?
After looking at the slope of gross margin, I don't think there is much room for substantial improvement in gross margin. Despite a stronger sales growth in herbal medicine in 2019, the increase in gross margin is substantially lower than it was in 2018.
Since 2017, gross margin has been expanding more than 3% per year. I think we are near its limit.
Additionally, and this is where having big data helps, Unilever business has never been able to score EVA margin more than 16%. This makes a substantial increase in EVA margin scenario a suspect since SIDO has already exceeded UNVR.
In other words, A further substantial increase in EVA margin is economically unrealistic in a competitive world.
Put it all together, it means from this year, the value gear begins to switch.
If 2 years ago a major proportion of its EVA growth is driven by improving profitability (EVA margin), now it would be driven mostly by sales growth. And that would not translate into a speedy EVA momentum like before.
If we expect sales growth to be 13% this year, which is a faster rate than 2019 (11%) due to coronavirus, then that would translate into EVA momentum of 2,2%. There may be a tiny bit of an improvement in gross margin which adds about 0,3% in EVA momentum.
All in all, I expect EVA momentum this year would be near 2,5%.
With that projection, EVA would still grow quite fast. Substantially faster than it was back in 2015 when the market expected too much. This is the part where it is now different from back then.
Which is why I would expect SIDO to reach another all-time high.
Of course, it still won't make sense, because there is no way SIDO could ever meet that expectation (7% expected EVA momentum and higher if it rises).
But there is a saying, as long as the music does not stop...people will keep dancing.
As long as EVA grows pretty fast...people will push it, human nature being what it is. Identifying the phase of excess optimism is crucial.
In short, this is what I have in mind. A reasonable projection, I'd say. This comes largely from sales growth with a tiny bit increase in gross margin. Compare it with what the market is effectively expecting right now.
As its share price continues to rise, the gap between the black bar and the white bar would widen.
In terms of Elliott Wave, we are likely in the phase of wave 4 of some sort. This means one more upswing, reaching an all-time high in wave 5 (of C) before a much more substantial decline. Wave 5 is characterized by excessive optimism mood.
As an earlier precautionary sign, one must consider the possibility of a bear market if the lower channel line is broken. This channel is likely to be very important.
Climate Awareness
Recently, UN just published its emission gap report. We are really way-off track to meet Paris Agreement with dire consequences. This is the interactive media of that report. Full of key messages, very engaging, and very brief. Just the way I like it.
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