This is the long term, bird-eye view of how well TOTL has been creating value.
There are two important observations here:
1. TOTL is a consistent value creator company.
2. Economic profit seems to max out near IDR 172-174 Billion
Note that the last swing in EVA expansion (2014-2017) is notably less steep than the prior expansion after global crises (2007 – 2013). Indeed, EVA momentum averaged 2.2%, and 1.2%, respectively.
What is the major factor that makes TOTL a consistent value creator?
A breakdown of EVA momentum shows that for TOTL value creation depends on its ability to manage its productivity (EVA margin). On the other hand, sales growth is rarely a significant factor that drives value.
Growth becomes a significant value driver only in 2012, 2013, and 2017...just 3 out of 14 years. What happened? In those 3 years, sales growth was exceptionally good: >15%.
TOTL EVA Margin is high. Few companies could manage to get EVA margin more than 5%.
Its EVA Margin peaked around 7.5% in 2013, 2014, and again in 2017.
In all the times when TOTL manages to get high EVA Margin, TOTL Gross Margin also expands beyond 17%. G&A expense does not seem to affect much the trend in EVA margin.
It is a bit disappointing to see its gross margin declined to 13.4% in recent 12 months.
Historically speaking, it is the lowest in the past 8 years. Depending on how you look at it, it could be said that gross margin is in a downtrend from its peak in 2013.
Why is that? I could not find any meaningful findings for that. Customers breakdown seems to offer no explanation either.
From cumulative quarterly data, we could see that revenue is Q3 2019 growth is -3.2% compared to Q3 2018. At the same time, COGS growth is 1.0%.
I strongly suspect this is due to slower construction progress. The longer it takes to complete a project, the higher its costs. It is unfortunate that TOTL does not show its ‘burn rate’ in its public expose presentations.
But let’s give TOTL a benefit of doubt. TOTL after all, is a consistent value creator and has been able to consistently outperform its best gross margin prior 2008 crisis. Surely by now, TOTL has adopted an effective project management tools.
Market Expectations
It’s important to note that in general, investors do not place optimistic EVA growth projection in TOTL share prices. MiM (expected EVA momentum) is generally flat near 0%. That means investors do not place expectation that TOTL could increase its EVA.
The implication of this observation is we need to be cautious when MiM deviates significantly from 0%.
A closer look of price-expected EVA dynamics gives more important insights. The chart below shows you how TOTL share price reacts to EVA outperformance, as measured by the difference of EVA momentum and MiM*.
You could see that the reason why TOTL share price exploded from 2009 – 2012 is because TOTL managed to consistently outperform market expectation of its EVA growth.
On the other hand, the market punishes TOTL when its EVA performance underperforms expectations. Share price goes down further when that happens, as was the case in 2007, 2012, 2014, and at present.
Conclusion
TOTL is a good company. It is a persistent wealth creator. The good thing is (good for me, bad for the company), investors generally tend to view less of its performance. They usually don’t place growth expectation, and quick to punish when TOTL underperforms their expectations. At the moment, TOTL is underperforming. Lower share price is warranted. When it does, it is highly likely that by then, the expectations are too low (and hence, could be beaten easily). I believe there is no problem in its gross margin. It is a year of slow construction progress, but I do not think it will persist or getting worse. Added to my watchlist.
Climate Awareness
No better words could be said than this 16-year old speech to give us a summary of the dire state of climate change. This is the final speech of Greta Thunberg in UN Climate Summit: COP 25 in Madrid this month.
Watch:
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