You can contact the author (Teguh Hidayat) by email, The author live in Jakarta, Indonesia.

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Between Wismilak and Sido Muncul

In fundamental analysis, I usually use a single indicator to find out whether the company is already well-established or not, ie the company's retained earnings. To put it simply, if a company has a large retained earnings, which is the accumulation of company’s past earnings, then the company is well established as it can be seen from its accumulation of profits. For example? Kalbe Farma (KLBF). In the third quarter of 2013, KLBF had the retained earnings of Rp7.6 trillion, versus the paid capital of only Rp508 billion. This means that the KLBF’ shareholders paid Rp508 billion for the company’s capital, but so far the company's accumulated profits has been far greater than the paid-up capital itself.

That's why if you notice - the company whose shares are categorized as blue chips, which on average is already well established and settled, their retained earnings are usually large. The following data is the value of retained earnings compared to the company's paid-up capital, from the ten largest listed companies on the Indonesia Stock Exchange. Note that if these companies never paid dividends during their life, or paid but in a much smaller value, then the value of their retained earnings would be much greater.

Retained Earnings (A)
Paid Capital (B)
Ratio (A/B)

(Rp billion)
(Rp billion)
1,878 (US$ million)

Note: The paid capital of BMRI was the greatest among all of them because about two years ago, the company held a rights issue to strengthen its capital position.

The more established a company, the greater the chance that the company will continue to doing well in the future (keep growing and making earnings), and also the lesser the risk to be bankrupt. That's why if you like the low risk stocks, then the choice are blue chip stocks above, of course if you could buy them at a reasonable price. The risk of these stocks is limited to market risk only, which if Jakarta Composite Index (JCI) went down, then it will usually follow. But on the other hand the corporate risk is relatively small, where the financial performance of the company will be safe and growing along years, almost without any interruptions. That is why in the bear market, then the best buy option will always be in blue chip stocks, because when JCI is eventually recover, then it is usually (though not always) the blue chip stocks that going up first, followed by the second liners.

Anyway, it is not what I want to discuss here, but back again to the issue of 'the level of establishment'. My point is, I just realized that the size of retained earnings cannot always be used as the sole criterion in judging whether a company has been well-established or not. A company could have zero retained earnings, and it is not because it has never had a net profit before, but because the company always distribute all of its net income as dividends.

And this trend usually occurs in companies whose business is focused only on one line of business, sometimes only on one or a few types of products, and the size of the company is actually big but not as big as like Astra International et al. The shareholders deliberately taken the entire net income derived by the company each year, because they do not have the intention to develop the company further. Because a company will only retain its profits as retained earnings (using only a portion of the profits to pay dividends, or even not pay dividends at all), if they need to raise the capital, to expand and extend the business.

So what are the example of companies that may have been established, although its retained earnings (in their balance sheet) are small? So far I have found only two companies: Wismilak Inti Makmur (WIIM), and Sido Muncul (SIDO). In the third quarter of 2013, WIIM’ retained earnings was Rp243 billion, versus Rp515 billion of paid capital, inclusive of additional capital from its IPO (before its IPO, the paid capital was only Rp210 billion).

Well, if you look at WIIM retained earnings which is only slightly larger than the fully paid capital (capital before the IPO), it appears that WIIM was still a new company, as the accumulated profits are still small.

Logo of PT Wismilak

But is it so? Perhaps, it is not. In the last five years, ie since 2008, company’s revenue and net income continue to rise steadily. But during the same period, its retained earnings were rise and fall in the range of Rp100 - 150 billion, or you could say: Unchanged almost at all. In 2011, WIIM’ profit jumped to Rp130 billion from Rp27 billion in 2010. But in that 2011, the retained earnings declined to Rp137 billion from previously Rp147 billion. The cause? Dividend payment for sure. Because WIIM’ debt position at the time was not diminished at all, but increased.

By the way , I forgot to mention that the position of a company 's retained earnings may not increase even though the company earned huge profits in particular year, because sometimes the company had to pay the principal of debts (in the income statement, it is the interest expense that may decrease the net income, not the principal, if the company had bank loans or bonds). But in WIIM case in 2011, it did not happen that way.

And if we considering the 50 years history of the company, including its brand of cigarette that already well-known throughout Indonesia, the it is not make sense if during those 50 years, the company had earnings of the same value of its initial capital. What is more likely is, WIIM always spent their profits for dividends, so its retained earnings are not growing up. It can also be seen from the position of retained earnings of the company in the third quarter of 2013, which jumped to Rp243 from previously Rp142 billion (in the same period of previous year). The reason? Because from the balance of profit in the year of 2012, the shareholders of the company only took Rp7.6 billion for dividends, or very small, while the rest of the profit remains retained. It looks like that the management began to take expansionary policy after the company went public. If in 2013, WIIM once again did not pay dividends except a little, then in 2014 the value of its retained earnings will rise, and of course its equity too.

In this case I suppose: If during the fifty years the WIIM shareholders never took dividends, or actually took, but not up to the whole net income each year, then what would the size of company’s equity at this time?

Therefore, WIIM may not be categorized as a start-up company, but a well established one. If in the previous five decades (since 1963) the company was able to make a consistent profit and increasing dividends for its shareholders, then it should won’t find it difficult to do the same at least to the next decade, and by that I mean that this company have a good outlook. If there are risk factors that can invalidate this assumption, is that WIIM’ management team at this moment if different from the past, so that they also may not be able to work as good as its predecessor (ownership of WIIM has changed since the early 2000s). However, if you look at the company’s financial performance in the last three years, the track record of the new guys is quite good.

Then how about SIDO?

As WIIM, SIDO also has a long history of establishment, ie since 1970, so by the end of 2013, the company has operating for 43 years. Even if calculated from year when the company's founder, Mother Rahkmat Sulistio, opened a business of herbal medicine at her home since 1940, the the age of SIDO is 73 years. With a long track record of performance and operations, and with such quality products that even have penetrated the foreign markets, then SIDO should be a large-sized company with big value of accumulated retained earnings.

However, in its latest financial statements as at July 31, 2013, the value of retained earnings was only Rp228 billion, very small compared to the value of paid capital (before the IPO) amounting to Rp1.4 trillion. However, it is not difficult to immediately find out that the accumulated net income of SIDO during its 43 years of operations is actually much larger than the Rp228 billion. In 2011, the position of retained earnings of the company was Rp440 billion, while the paid capital was only Rp36 billion. But in 2012, the owner of the company, ie Sulistio Family, once again took large amounts of dividends, then paid it back to the company in the form of paid-up capital amounting to Rp1.1 trillion (so that the paid-up capital increased to Rp1.4 trillion).

So where the Sulistio Family obtained such funds? Most likely from the accumulated dividends from SIDO itself in the past. As far as my research, the Family have no other business outside of SIDO (or maybe have, but their main business is SIDO only), and they do not like leverage (taking debt, or forming an equity partnership) as commonly conducted by large conglomerate groups in Indonesia, but only manage the company as usual, which makes ‘Tolak Angin’ herbal, then sell it, done.

That's why, if SIDO could make an average net profit growth of 20% in the decade ahead, as its track record in the past five years, then the real value of SIDO could be far greater than its book value (read again about the intrinsic value). Actually, SIDO’ CAGR of net profit from 2009 to 2012 was 60%, aka very large, but I do not consider that the company will be able to sustain these achievements in the decade ahead, because there will be lots of events that happened during the time, so the average growth of 20% is more realistic.

When compared with WIIM, SIDO is more established as it can be seen from the company's dividend policy, which SIDO will distribute a dividend of at least 20% of its net profit every year, while WIIM will pay dividends of maximum of 30% of its net profit  This means that if you like a stable dividends, SIDO is the best option. But if you like the growing company, then you might prefer WIIM. And yup, WIIM currently have a lot of projects to become a greater tobacco company than ever. Most easily, it can be seen from its cigarette production capacity which has reached 3.5 billion cigarettes per year, and still continues to increase, from the previous (before its IPO) of 2.5 billion cigarettes per year. Actually, SIDO also has the same expansion project where the company plans to increase its production capacity of its main product, Jamu Tolak Angin, to be doubled by the year 2015, but there is no information about the increasing capacity of production of other products. As you might know, SIDO also have the product of Kuku Bima energy drinks, health drinks including esteemje, tamarind candy, ginger milk, etc).

Anyway, if we look at the level of reliability over the company as a major concern of decision-making, then SIDO is clearly better for investment. Also, the company does not have a significant competitor if they want to expand their business, and this is totally different with WIIM that is just a small player when compared to the Indonesian tobacco giants, like HM Sampoerna, Gudang Garam, and Djarum.

But what about the valuation of its shares? Well, in this case WIIM is better. In the third quarter of 2013, WIIM had equity of Rp760 billion. At the share price of 650, then the market cap is Rp1.3 trillion, and that means 1.8 times of PBV. This figure is very low for the size of the consumer goods stocks, and can only be defeated by Tiga Pilar Sejahtera Food (AISA), but WIIM is obviously had a longer history than AISA, which is only a start-up company (AISA’ history as vermicelli company has already begun since 1959, but the company's great step as a large and integrated food company was initiated in 2008).

While SIDO? Post IPO, SIDO’ equity is approximately Rp2.5 trillion. At the share price of 760, then the market cap of SIDO is Rp11.4 trillion, and that means 4.6 times of PBV. Okay, as I have ever said before, maybe this doesn’t mean that SIDO is overvalue, because after all, Kalbe Farma (KLBF) is far more overvalue, and valuation of SIDO also can not be equated with WIIM because its whole fundamental is better. But still, based on my experience, a stock with premium price like SIDO is easier to fall than any other stocks with a lower valuation, if its later performance was not as expected, or if there is a particular bad news. I think, SIDO will be attractive if ist PBV was at 3.0 – 3.5 times, which means the price of Rp550 - 650 per share.

At the end, both stocks are good selections which represent well-regarded consumer goods companies. Both WIIM and SIDO are very attractive for investment not only as they are consumer companies, but also because both have big names, and because if is based on their latest and historical performance, the two companies have very good fundamentals. If you are concerned with the value thing, then WIIM is the best option. However, when compared with KLBF, then obviously, SIDO is far better.

PT Wismilak Inti Makmur, Tbk
Rating of performance in Third Quarter 2013: AA
Rating of share at 650: AA

PT Industri Jamu & Farmasi Sido Muncul, Tbk
Rating Performance on July 31, 2013: AA
Rating of share at 760: BBB

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