EVA Brief: TELE (Tiphone Mobile Indonesia)

I started investing seriously in 2016. My first stock was Erajaya (ERAA) which I sold nicely in 2018. It was very sweet in 2018, but in the beginning, it was not so. At that time, Erajaya was completely overshadowed by Tiphone (TELE). It made me wonder if they are really in the same sector. Back then, I had no idea about EVA. When the smoke clears, it was pretty much a lucky hit.

Just less than 3 years ago, TELE was a darling stock. ERAA holders like me were left in the dust. Then it has been going down the drain ever since. In July 2017, TELE reached 1,300/share at its peak. Now, it is only 179/share with bad news regarding some issues in its debt payments.

What happened to TELE?

This is the TELE price chart. It goes up sharply in 2017, then quickly reverses down in mid-2017 until now.

And below is its net income. I have met many people, some of them are investment professionals who believe that fundamental analysis is really about forecasting net income. They believe EPS is the most important fundamental that moves the market. I am shocked by the naivety and stubbornness.

Let's give net income a shot. Below is TELE net income (Q3 2019 is in the last twelve months). What is on your mind?

Looking at the chart above, you might as well just give up the idea that TELE share price has anything to do with its fundamentals.

Let's try this again one more time. This time I'll bring up EVA (Economic Value Added).

I'm pretty sure that the above chart lightens up some readers' faces who have been struggling to understand TELE share price from its fundamentals.

If you could predict the EVA chart above, and nothing else, you would have a good reason to buy TELE stock in 2016, then sold it in 2017. It becomes obvious to you that the risk is high to keep holding the stock in 2017 when it exploded. In reality, you might have a good clue as early in Q2 2017 that something is wrong. If you are buying into net income, chances are, you would have no reason to sell it and you are caught at the market top. Your investment evaporates almost 90% of its original value, and you still have no idea what is going on. That is inexcusable!

Let's talk about the broader picture of the industry. As it happens, I have already analyzed ERAA. I believe just these two companies' performance alone already gives a good big picture of Indonesian handphone distribution industry. The below chart is ROIC for both companies, and as it happens, the key needle for EVA, and therefore value for both companies.

What the above chart means is this: If you are good at running a business of selling handphones and vouchers, then you would be able to generate a return that is a bit short of your opportunity cost (cost of capital) which is somewhere around 12%. (See how ERAA ROIC exploded in 2018? That is why its share price went boom).

The above chart should convince you that it is very hard to generate an excess return (and by definition, positive EVA) in the handphone distribution industry. And without positive EVA, there can be no added value. No-added value prospect is a legitimate reason for investors not to pay above its book value. This is why ERAA and TELE have Market Value/Capital (alternate version of PBV) that gravitates toward 1.

More often than not, the market is no fool, and you can prove that with EVA. The funny thing is, EVA is not well known here. Just as the title of a physics book that I read some time ago, reality is not as it seems.

For a more detailed analysis, I prefer to switch from ROIC to EVA margin (EVA/Sales). You will see shortly why. The break-down analysis is simply subtracting and addition, not multiplicative (that infamous DuPont break-down).

This is the break-down of TELE economic profitability (EVA margin)

Here is how the number works. EVA margin is simply NOPAT margin minus both working capital and fixed asset charges. NOPAT margin (the blue line) has to be above the combined charges from working capital and fixed assets so that the business is truly profitable in the economic sense (having positive EVA).

In 2015, TELE combined charges of working capital and fixed assets is 2.8% (2.4% + 0.4%). Operating margin has to be 2.8% at a minimum so that the business simply breaks-even, just giving its investors their minimum required returns, and nothing more, which means there is no added value. TELE just did exactly that, almost...

Study the EVA margin breakdown chart above carefully. You will have a better understanding of why it is very hard for TELE business to earn an excess return (positive EVA margin). Most often, they are just breaking even.

Recently, the situation got worse. It happens too with ERAA. Its sales contracted while at the same time, its major voucher supplier requires more advance payment. This drives up the charge for its working capital. This major development is ignored by net income.

At the moment, investors are effectively expecting TELE EVA to continue to contact. Expected EVA momentum is -0.2%. That means investors are expecting this year EVA to be somewhere around minus IDR 192 Billion from currently IDR minus 142 Billion. That is a sensible expectation. It is what you call extrapolation from the past trend. Since 2017, EVA momentum has contracted by 0.3% on average annually. Right now, investors are betting that the contraction rate will continue.

I think that is too harsh. A closer look on EVA margin tells me that TELE core business performance is still stable. Gross margin is stable, operating expenses are contained. The big question mark is of course whether sales would continue to contract. But even if voucher demand contraction continues, TELE could cut back their purchase from Telkomsel or renegotiate its advance payment deals, and its net effect could still boost EVA. I believe there are several options that TELE's management could pull to put TELE business on the break-even path per usual. However, I believe it is nearly impossible to go beyond that.

One more thing. For the first time since 2015, investors are effectively valuing TELE as a wealth waster. Right now, MVA is IDR -3 T. That's too much. We could get more insight by bringing ERAA valuation here, and the case for TELE undervaluation would stack up. The potential of this pessimism is lucrative. If investors see TELE as a value-neutral again, its share price would appreciate considerably. The key is whether sales continue to contract this year. But keep in mind that there are also ways for TELE to better their EVA even if sales continue to contract. Do not get lost in the news regarding its debt paydown issue.

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Climate Awareness

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Read the full article in The Guardian