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Kedawung Setia Industrial

If you type the word 'Kedawung Setia Industrial' in Google, then you will find interesting fact that this company, even though only a small company and its stock is not liquid, but it is quite often covered by fundamental analysts/ investors, especially in terms of its low valuation. And indeed, with PBV of only 0.4 times at the price of Rp369 per share, while the company's financial performance isn’t too bad, the shares of PT Kedawung Setia Industrial, Tbk. (KDSI) is very attractive for bargain hunters. And here’s the analysis.


KDSI is one of few listed companies that is not headquartered in capital of Jakarta, but in Surabaya, East Java Province (and maybe that's why its shares are not covered by brokerage analysts or large mutual fund managers, because they have to get out of City if they want to see the directors). KDSI is engaged in the manufacturing of kitchen utensils (pot, food basket, etc.) that coated with enamel, a kind of special paint that makes kitchen appliances becoming more colorful and labeled 'classy'. Yep, KDSI does not produce the usual kitchen appliances, but high quality ones that is sold in large supermarkets.

Although is not a well-known company, but KDSI is one of the largest kitchen appliances manufacturer in Indonesia, which has been operating since a long time (from the 1970s), and have penetrated the export market. By the IDX, KDSI is classified as a houseware company, or a group with Kedaung Indah Can (KICI), and Langgeng Makmur Industri (LMPI).

In addition to making pots and pans, KDSI also has a subsidiary that is engaged in the manufacture of paperboard boxes aka cardboard, egg container (which is also made of cardboard), and plastic mat. Today, KDSI is more engaging in producing and selling cardboard boxes instead of kitchen appliances. Until the second quarter of 2014, the company recorded revenue of Rp795 billion, Rp698 billion of which came from the sale of cardboard boxes, and only Rp91 billion came from the sale of kitchen appliances (the sales value of egg container and plastic mat was Rp7 billion). And similarly in previous years, the majority of company’s revenue was derived from cardboard boxes. This may cause a little confusion, because during this time KDSI is much better known as a manufacturer of kitchen appliances rather than cardboard boxes. Included in the company's official website, www.kedawungsetia.com, it is not mentioned that the company produces cardboard boxes, but only pans and other kitchen utensils. But if you look at the facts above, it is clear that KDSI is cannot be referred as a manufacturer of household appliances, but a cardboard box manufacturer.

Frankly, I do not much understand about the cardboard box business in Indonesia. However, because KDSI’ products are sold to the consumer companies such as tobacco companies, food and beverage, and electronic goods, so we can assume that as long as the consumer industry moving forward, KDSI will always have buyers for its cardboard box. And the good news, as we all know, consumer is the most stable industry in the world.

However, KDSI face several challenges in carrying out its business. For the segment of enameled household appliances, for example, the trend continued to decline since the applying of ASEAN - China Free Trade Area (ACFTA) in Indonesia in 2009, as the company has to compete with house appliances from China that flooding the domestic market. As a result in 2013 ago, KDSI only produce 4,050 tonnes of enameled household appliances, or down 12% compared to the year 2012. But fortunately the implementation of ACFTA does not affect on company’s cardboard box businesses, where the trend still continues to rise in last five years.

And maybe that’s why, in 2013 the management decided to focus on developing the cardboard box business, where they invest Rp80 billion (equal to US$ 7 million) for establishing a new factory, which will increase production capacity from 15,000 tons to 29,000 tons of cardboard box per month. The factory have been completed and are currently operational, but didn’t yet contribute to the increase in revenue and net profit of the company. Until the second quarter of 2014, KDSI earnings grew only 2.8%, although its revenue rose 15.5%. The inhibiting factor is the rising prices of raw materials.

Here are some other points that you have to consider about KDSI.

  1. With return on assets (ROA) of only 3.9%, KDSI was not a profitable company. The company’s dependence on imported raw materials causing its profit margin to be very small, about only 2 – 3%, although the annual revenue was fairly large (larger than the total assets of the company). It is one of the weaknesses of the manufacturing industry in Indonesia, where there are many missing links in the chain of the industry itself. For example, Indonesia is actually one of the largest paper producers in the world, but the paper must first be exported abroad to be processed into carton, then imported back by KDSI. If there is a local company that can produce paperboard in large scale (actually there are some local companies who can process waste paper into paperboard, but the total production capacity was very small), then KDSI can buy raw materials at a cheaper price from local producers, so that its profit margins could be better. But unfortunately, the fact is not that so.
  2. The company will probably abandon the household appliances business, because of its two major problems: 1. The ACFTA earlier, and 2. An uncertainty supply of raw materials. During this time, KDSI obtain metals to make pots from PT Krakatau Steel (KRAS), but KRAS itself is often run out of goods.
  3. The management of KDSI is not an aggressive type, where they usually only aims to increase revenue/net profit of 10% per year, which probably because they are, considering the difficulties factor above, preferring to be realistic. For the year 2014 there is a possibility that the increase could be larger than usual because of the new cardboard box factory, but once again, so far it has not been presented on company’s financial statements.
  4. In the last five years KDSI successfully recorded a consistent increase in income and net income, although, once again, the percentage of the increase is not convincing. In 2009, KDSI had revenue of Rp960 billion, which became Rp1.4 trillion in 2013, or rose only 44% after five years. Considering the rate of inflation, the growth rate was almost zero or even negative.

If we look at the facts above, it is difficult to conclude that KDSI is a good choice for investment. However, KDSI remains discussed in this website for the reason that already mentioned above: With PER and PBV taht are 4.0 and 0.4 times respectively at the price of Rp369 per share, KDSI is very cheap indeed. Based on my experience, a stock that is absolutely undervalue (its PBV is far below 1.0 times) could rise or even skyrocketted at any time if the financial statements show a significant increase in equity or net income, say up to 100%.

And because KDSI has just increase its production capacity of cardboard boxes to nearly double last year, then it is likely that the company's earnings could jump at any time, whether in the third quarter, or the next year. Okay, the jump in company’s net profit does not happen so far, and that's why its stock has tend to be stagnant (and also with almost no transactions). However, because on the other side the stock of KDSI could not go lower even if later the Jakarta Composite Index (JCI) fall (because it is already too cheap, while the company, although the financial performance is not too good, but never exposed to any issues), then this stock is a good choice for those who are willing to wait in order to obtain the jackpot a later time, almost without worrying about the risk of loss. Although, indeed, because of its liquidity problems, the stock is less suitable for those of you with large funds, unless if you cant buy it in installments (and then wait).

So, want to test your patience? FYI, Mr. Haiyanto (a veteran individual value investor) also holds the shares of KDSI since a long time, ie since 2011 or maybe even longer, in large enough quantities, ie almost reached 210 thousand lots (per June 30, 2014) or equivalent Rp7.7 billion (equal to more than US$ 800,000) based on the price of Rp369 per share. Interestingly, the amount of Mr. Haiyanto’ ownership is sometimes ups and downs, that if at any time the shares rise (about one and a half years ago, KDSI briefly rose to Rp700 per share), then the ownership will be reduced, and if the stock was fell like today, then the ownership will increases. Got the point? In essence, Mr. Haiyanto is actually trades his stock as well, only using the method of value investing and took the relatively long period of time (after he bought the stock, he may sell it more than one year later).

And if you look at the fact that every time the stock is rising, then the increase is always higher than 5 - 10%, it clearly seems that the 'trading' style of Mr. Haiyanto, even though it requires extra patience and also a little trouble (because Mr. Haiyanto can not buy KDSI at once, but in installments), but always making a tremendeous profit, while on the other hand the risk was almost zero!

And that's what we call, 'the beauty of value investing'.

PT. Kedawung Setia Industrial Tbk
Rating of Financial Performance in Q2 2014: BBB
Rating of Shares at the price of Rp369: AA

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