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.
Companies
|
Retained Earnings (A)
|
Paid Capital (B)
|
Ratio (A/B)
|
(Rp billion)
|
(Rp billion)
|
(x)
|
|
ASII
|
70,921
|
3,163
|
22.4
|
HMSP
|
9,718
|
544
|
17.9
|
BBCA
|
54,144
|
7,116
|
7.6
|
TLKM
|
55,477
|
7,343
|
7.6
|
UNVR
|
5,338
|
172
|
31
|
BMRI
|
54,229
|
28,869
|
1.9
|
BBRI
|
64,968
|
8,941
|
7.3
|
PGAS
|
1,878 (US$ million)
|
501
|
3.7
|
SMGR
|
16,995
|
2,051
|
8.3
|
GGRM
|
27,169
|
1,016
|
26.7
|
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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