TBLA processes crude palm oil and sugarcane into a product like biodiesel and cooking oil. Therefore, you could expect it has a higher gross margin compared to pure producers of palm oil. Because its raw materials are palm oil and sugarcane, an increase in both commodity prices would hurt TBLA margin. Let's see what the facts are first.
Sure enough, TBLA gross margin is above 20%. If you look at NOPAT margin above, you would likely conclude that TBLA is doing great these days.
NOPAT margin has never been better since 2014. As you could see above, NOPAT margin rises because its gross margin is in an uptrend since 2015. That happens because CPO price is in a major decline.
To add, NOPAT margin also got further boost from lower export tax.
And that is why its 'bottom line' is in pretty good shape.
Unfortunately, I was messing with you. I just gave you an incomplete picture and led you to a misleading conclusion. NOPAT margin is only half the picture, and net income is pretty much irrelevant.
Without a reliable bird-view, it is too easy to get lost in specifics and cherry-picking information that conforms to what we want to believe.
Let's start again with a value-focused view that starts from the top view. Here is TBLA EVA.
I believe many of you are surprised. From EVA view, TBLA is hardly a profitable company. And without positive economic profit, there is no value-added. Without value-added, how do you expect the market to give value above its book capital?
As made evident by Enterprise Value/Capital, this is exactly what happens to TBLA. The market follows economic logic.
Put it another way, it is hard for TBLA to earn a return above its cost of capital. I believe its cost of capital (WACC) is above 10%. You would be hard-pressed to argue that the WACC of the majority of Indonesian companies is less than 8%.
In 2017, TBLA managed to earn a positive economic profit. How did it do that? Its ROIC was up quite a lot as you can see from the chart above. That is mainly driven by gross margin that reached 26% and a much faster inventory cycle. Demand was particularly good in 2017. Items were sold quickly.
Things then changed since 2017. Demand has been flat. However, the management keeps expanding its investments both in working capital and its plantation. TBLA plantation is mostly matured. It looks to me that TBLA has been purchasing mature plantation which is getting more expensive.
Expanding when demand growth is nowhere to be seen hurts value. Let's also not forget that TBLA business usually could not reach break-even from an economic profit view.
Now that we have covered TBLA performance, here are some things to consider:
-TBLA EVA is likely to get worse this year as CPO price is now at a level last seen in 2015.
-Expansion is still ongoing. Management is planning to invest aggressively to upgrade its plant capacity. And that means a higher capital charge to bear.
I very much doubt the demand from biodiesel policy would change TBLA's EVA outlook. The benefit (if any) would likely be very small, and since the company's response to the policy is aggressive expansion, the net effect would be EVA negative. In the middle of it all, don't forget that the raw material, CPO, is now at a level higher than the prior 3 years or more.
The chart below sums up what I think would happen to EVA this year. And this even assumes the management target of revenue IDR 10 T is achieved. That's almost 15% growth in sales from recent performance (LTM Q3 2019). EVA momentum would contract by 1.4%, a bit worse compared to Q3 2019 result.
What is the market saying now?
At the price of 675/share, the market effectively expects EVA to be pretty much stable with almost no growth. Compared to my projection above, that's still quite optimistic.
Comments