Stocks: ARNA, TOTL, UNVR, ANTM, JSKY
This roundup takes far longer than I wanted. Honestly, it is more interesting to look at new things than to revisit the past. It has been more than 7 months since I analyzed these stocks. Things have certainly changed, mostly bad. In analyzing ANTM, gold analysis is unavoidable. I plan to post my gold analysis after this, but I spell out the general idea in ANTM section. Hopefully, I could finish at least 2 more roundups in this month.
ARNA (Arwana Citramulia)
Any change from what I said 8 months ago? None where it matters. Although recently I have found a new trick to gain an interesting and a very useful way in viewing how the market values a stock. Not as practical as EVA momentum vs its expected number, but it gives a flowing perspective.
In the chart below, I have broken down ARNA share price to its useful components: the value of its invested capital, the value of its current operation (COP), and the value of its expected growth. This way of framing a share price is heavily influenced by Dodd & Graham. Value investors tend to avoid paying for growth, the gray area in the chart from EVA perspective.
One more thing: the management expects ARNA net income to actually grow this year. The management fired about 8% of its employee so far. I can’t say about its net income. That number could vary a lot for reasons unrelated to operations. If the management could aggressively cut its SG&A expenses, say by 30%, they have a good chance at maintaining EVA the same as last year. But the chance is slim. I think it’s about time that grey area to disappear.
TOTL (Total Bangun Persada)
8 months ago, I expected TOTL share price to fall further to the point where
“When it does, it is highly likely that by then, the expectations are too low (and hence, could be beaten easily)”.
When I wrote it, TOTL share price was 426/share. 3 months later, it fell to 280/share. This is what the market thought at that price:
For the first time, investors believe that TOTL would become a wealth destroyer company. The fact is, TOTL has never been one. It has been a consistent wealth creator, capable of earning economic profit every year.
But now things have changed. The problem of declining gross margin was apparent last year. It is a crucial factor for TOTL EVA. I thought it was only temporary. The declining gross margin in 2019 was still within its historical boundary, which has been pretty stable.
That is no longer the case this year. Q1 2020 saw a rapid decline in gross margin plus contraction in sales. The later is less important than the first. Added with the possibility of joint ventures could not bring profit back home, I think we would likely see its operating profit got slashed by 70%! That would spell negative economic profit for the first time.
This year brings a big change. The good news is, at 280/share, investors effectively have priced that red economic profit level to be the new normal for TOTL. It’s a record low expectation and a record low real performance. But now I fear further EVA contraction would persist.
8 months ago, TOTL current price at 332/share would look like a mouth-watering discount. Now, with a major EVA contraction almost set in stone, the recent lowest point (280/share) looks fair.
If TOTL makes another new low, my interest in this stock would be back, at least for another round of analysis. This dramatic change requires hard proof for me to change my mind. Preferably, in the form of gross margin recovery. There is just too many sad stories from investors in Indonesian construction sector because they believe in narratives like ‘it’s going to be temporary’ or ‘Indonesia still has massive construction opportunities’.
UNVR (Unilever)
If you ask me what is the most successful company in Indonesia in ‘acting in the best interest of shareholders’, I would say Unilever Indonesia. A consistent increase in EVA for 10 years is a phenomenal achievement by global standard. Unilever excels at value creation game, which is increasing EVA. How the management manages to do that, however, may not be pleasant to every ears.
Back in 2017 and 2018, the management takes pride in keeping its employees. When it is clear in 2019 that the growth lever is no longer functioning, it caved in to the pressure of acting in the best interest of shareholders. It succeeded in increasing EVA as a result.
Of course, unless a stock market is a big ponzi game, UNVR could never make as much money as investors valued it at IDR 427 Trillion at its peak. That is called overvaluation, and when it is extreme, it is called a bubble, irrational exuberance. That illusion of value is maintained by keeping its EVA improving (but could never be at a rate to justify its share price).
That illusion is crumbling. There is no way EVA would not contract this year. Signs of management desperation are appearing. You could see the defensive tone at its disclosure to the exchange in June, then there is no attachment at all in July, and then there is the stock split.
I am pretty sure the management is no fool. They should know that the idea of increasing its share price by splitting its shares is as ludicrous as borrowing IDR 1 trillion to buy back its shares to increase its share price... simply because both actions do not bring fresh money to the company, hence, the company value could not increase. But of course, I bet many retail investors buy into that story. In my view, that stock split action is a sign of desperation, hoping for a miracle.
There are stocks that many people still believe are immune to substantial bear market. UNVR is one of them. Everyone has it in their portfolios (the big funds), so there is no way ‘they’ would ‘let it to collapse’, or so the logic goes. That blind belief has already been crushed in HMSP and GGRM.
ANTM (Aneka Tambang)
It is reasonable to expect EVA improvement in this year, and with that its share price. Gold price has been on the rise since last assessment. After ANTM share price got whacked for poor 2019 performance, EVA should be better this year.
However, I believe this gold rush will be short-lived, and so does ANTM share price appreciation. Gold lives from speculative greed, not inflation hedge as commonly believed.
Post WW2, gold has 2 secular bull markets. The first one in 1970s started after the US tore down Bretton Woods agreement. Central banks no longer needed to fend off speculators to keep gold price unchanged. Nothing to do with inflation.
The second one started in early 2000’s. It came after Reagan & Thatcher made massive deregulation in banking sector in 1990s which encouraged them to be speculative. The tsunami of casino money found its way in housing market, and earlier in tech sector. Again, nothing to do with inflation.
And now, gold is alive because of massive money printing of central banks in large economies. The money is supposedly intended to help struggling people in this ongoing pandemic event. As per usual, it found its way to the casino in the form of tech sector (see Apple, Google, Amazon, Tesla stocks) and in gold. Where is inflation?
Unlike in the previous 2 secular bull markets, we are now still living under the 2008 crisis shadow. Debt is at all-time high, inequality is getting worse, and real investments that create jobs are slashed (which has been declining since 2008 crisis). The net effect guarantees the end of growth. How long do you think a ponzi game could last when there is no more real wealth created?
JSKY (Sky Energy Indonesia)
In less than a year since my last assessment, JSKY got worse. Q4 2019 EVA was hit hard. Salaries and allowance in 2019 went up 60% from 2018. Possibly related to smooth its sales in the US. I would expect that market is pretty much dead now. What kind of customers do you think JSKY aim in the US? People who live in minivans. They use portable solar panel for energy source. US market in that segment is dead now. Hope for growth in domestic market is a wishful thinking. Indonesia has no plan to meaningfully change its coal consumption leaving solar panel share negligible.
In short, there is no reasonable basis to expect JSKY to finally earn its cost of capital (zero EVA) anytime soon. As much as I want renewable energy providers to flourish here (despite the lack of government support), an objective analysis says JSKY is a negative EVA company, it got worse, and there is no basis to expect major improvements. It should be traded below its book value, and now it is vulnerable to be delisted.
Some solar panel companies, especially in developed countries, do indeed have seen substantial real performance. Not the case for JSKY. This is a revealing comparison between 2 solar companies. One has great economic performance, the other is the opposite.
EVA Gallery Is ON!
I have been finding ways to better keep track of EVA analysis I have done so far. Looking at charts is certainly a much more efficient way to get the general idea. That's where Instagram gives me a solution: to make a gallery. I will not write short analysis there. It will be just charts of true economic performance of companies. More EVA charts will be added whenever I have extra time (and motivation, of course). Click the link below to enter EVA gallery, and if you like it, don't forget to hit the like button and follow.
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