A long term view of UNVR value creation:
LTM Q3 2019 shows UNVR is doing a great job despite what everyone says about its lackluster sales growth and bottom line figure.
How did it do that?
Back in 2016, the source of EVA growth was majorly sales growth. Sales growth averaged 12% from 2010 – 2016. After 2016, it is entirely a different story.
Realizing the value driver for growth is not an option, executives then focused on tackling productivity lever which means they aimed to increase ROIC (EVA Margin). And they succeeded.
EVA margin increased by almost 1% from 2018 – LTM Q3 2019. Chart below shows the breakdown of how UNVR managed to get this 1% increase.
First, it sold its spread business at a high price last year. This massive reduction of capital effect is still in effect (average calculation is used for invested capital).
Second, and more important for current and future assessment, UNVR managed to increase its NOPAT margin to a record level.
How did it do it? UNVR managed to increase its gross margin by keeping its cost of production low and then reducing its general & administrative (G&A) expense. Quite possibly by streamlining its workforce.
At any rate, this effort pays off well. EVA margin (and ROIC) increased, and by doing so, UNVR reached an all-time high in NOPAT margin.
It managed to rise its EVA, despite the low growth pressure. That’s a clear evidence to believe that UNVR management is acting in the best interest of its shareholders.
However, its current share price (41,200/share) demands a ridiculously high EVA growth expectation.
In fact, UNVR share price has always been grounded by unrealistic expectations.
At the current price, UNVR MIM is about 10%. EVA is expected to grow from the current level of IDR 6,745 Billion to IDR IDR 28,135 Billion in 2024.
Assuming a constant EVA margin, sales growth would need to grow on average by 60% in 5 years at the very least. Ridiculous expectation.
But optimism is the norm for UNVR. The problem is, how much is too much?
From the chart above, I believe EV/Invested Capital of 45-46 is already too much. That level is associated with MIM above 12%.
2017 market top implies MIM of 15%. I call that too much.
Do you believe in market cycle?
What happens after extreme optimism?
The following charts give another perspective. It is amazing when you put information from EVA in the context of Elliott Wave label. I do not want to spoil it for now.
*Note: The circled area marks the sharp lines. Those lines do not exist. It may be a fault in my charting software.
I do not pay attention to traditional chart patterns. An exception is head & shoulder, only if it is significant.
Call For Earth
From here on out, I will promote significant pieces on every EVA Brief publication that inform us on the state of our global climate that has been coined recently as 'climate emergency'.
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