For those of you who've read this blog for a long time, you probably know
very well that Bumi Resources (BUMI) is the one of the stocks that I would NOT
recommend. The reason? No, not because I've been loss on the stock, because I
never had it. But because, when I was getting into the stock market for the
first time in 2009, BUMI is a stock with big zero fundamentals with very large
debts and poor earning powers, but oddly owned by many investors, not only
local retailers but are also foreign fund managers, and at the time BUMI was
practically the most popular stock
in the Indonesian Stock Exchange. And this was really disturbed me: What’s
wrong with you people? How could you choose this stock as your favorite
investment???
However, over time, investors are eventually realize that they are not
going to gain anything from BUMI, and the stock slowly but surely continue to
fall. In the end of 2009, the Jakarta Compsite Index (JCI) closed at 2,534,
while BUMI closed at 2,425. And now? When this article was written, JCI was in
a position of 4,391, or has risen 73.3% in four years. While BUMI? It plunged,
not to 1,000, or 500, but.. 300's already! If in the last year the people were
still confident to say that BUMI will not follow the footsteps of its brothers
to become a member of club of ‘gocap’ (an Indonesian term for stock at the
price of Rp50 per share, the lowest possible price in the exchange), now they
began to have doubts. The term of 'stock of
a million people' as BUMI’s nickname was already long gone, and the stock
is no longer a favorite, even for speculators.
Anyway, that's not what we will discuss here.
You probably know that Mr. Lo Hong Kheng (LKH), the most famous individual
investor in Indonesia, is currently stuck in a bad position on BUMI. And I have
received a lot of emails which ask about this, because LKH is one of my mentors
as well. Most of the email asking what was the reason of LKH’ decision to buy BUMI,
but there are also some critics, saying that this time LKH have done a big
mistake. Well, here are some things I can say:
First, LKH buy the stock of BUMI, including bought some other Bakrie stocks,
not because of following the crowds, or because he had some ‘revelations’, but
rather because its sole discretion, which is made in detail, carefully, and
using conservative assumptions. For a value investor like him, the main
consideration is always simple: A stock, whether represents coal or other
companies, is worth to buy if the price is much lower than the real
value/intrinsic value of the company. BUMI at the price of 8,000, 5,000, or
3,000 might not be worth to buy. But how about 1,000?
But what if I bought BUMI at the price of 1,000, then it just dropped
further to 300? Well, just leave it be. In 1972, Warren Buffett had bought the
shares of The Washington Post at a certain price that he considered already
discounted. But instead of going up, a year later the stock fell and lost about
half of its value, but still, Buffett keep holding it. Until finally, about
twelve years later, The Washington Post stock rose twenty-five times! Perhaps LKH also learned from that Buffett’s
experience, where he do not care if he have to wait for twelve years, including
if the stock drop like crazy, as long as in the end he could make a multiple
times of profit, and not just ten or twenty percent.
Just a note, LKH never said he bought BUMI at what price, but it's probably
around Rp1,000 per share. And if he’s average price is 1,000, then that is the
price which he considering reasonable, but please note that his assumption may
be wrong, of course. LKH himself once said to me that he might be wrong in
picking stocks.
Second, LKH not bought BUMI when it was in its zenith of popularity, but
rather when it lost its title as the ‘stock of people’ (saham sejuta umat, I
don’t know what is the right term for this) around the end of 2012, including
when everyone (in the end) dumped the Bakrie’s stocks including BUMI. It is
also in line with what is exemplified by Buffett. In 1964, the stock of
American Express (AXP) plunged drastically after the company got caught a
scandal that caused a loss of about US$ 150 million, or about US$ 1 billion at today’s
currency. The status of AXP had suddenly changed from investor’s favorite stock
into a total waste, as the company is predicted to be bankrupt soon. But you
know what? When the stock price went down until a certain price, Buffett bought
it massively! Of course, AXP did not going up immediately, but at first had
continued to decline. But in the end the stock was eventually rise, and AXP
then became one of the most successful stocks in the portfolio of Berkshire
Hathaway, until today.
And if you notice, that’s the behavior of a value investor: He gets it when
everyone else got out. He bought a good stock that the other consider it as a
crap, and he likes stocks that no one wants to touch it. But believe it or not,
this kind of 'contrarian' strategy is actually the strategy of many famous and
successful investors, including LKH itself.
But in this case I do not say that BUMI will eventually rise as well, because
we would not know about that. However, when compared with Berlian
Laju Tanker (BLTA), for example, which the company was in trouble with its
debts, even it was almost bankrupt (or it is already?), or when compared to
Dayaindo Resources (KARK), then BUMI is still operating normally until now,
including its coal production volume is still increasing steadily. Yep, in its
financial statements, BUMI did look very, very bad with even a negative equity,
aka capital deficiency (the amount of the debt had been greater than the total
assets of the company). But on the mining field, the company is still operating
normally, and have no debt issues with the creditors, so that it is the
financial statement, which was intentionally made to look ugly. Or at least
that’s what LKH thought (maybe, I don’t know).
Finally, the third, the biggest problem of BUMI is of course lies in its
management, in this case the Bakrie Group, which is never fair to public
investors. However, LKH’ position as a big guy caused him different from
ordinary retail investors. LKH might also pointed himself as a commissioner or
director of the company, although he did not. So in this case LKH is looking at
the company's low valuation rather than the quality of management, because unlike
public investors, he is in a position that allows him to actively participate
in determining the policy of the company. LKH is also a good friend of Samin
Tan and several high officials of BUMI, and I think if we've come to a position
of 'inner circle' like that, then we will not take care about the market price
of the stock, as long as we can see that our partners are still willing to cooperate
in managing the company, and the company itself is still running well without
any significant problems.
In the end, until this moment, I still do not think a second to buy BUMI. The
first reason is, because I've got my own investment plan, and secondly, I do
not have enough assets to be able to invite Nirwan Bakrie to a lunch, so in
this case my position, and perhaps your position as well, is different to LKH. And
how about the stock valuation of BUMI? Is it already undervalue so it is worth for
the investment? Well, I do not know because it is very difficult to analyze
this stock because its financial statements is fully engineered, but the price
of 300 is certainly cheaper than the price of 8,000, is not it?
In fact, LKH is still holding the stock, so he does not assume that his
decision was a mistake, although the stock have gone down. Just a note, for an
investor who are already well known by the public as LKH, the psychological
distress is not only when his stock is down, but also when there are plenty of
criticism or even condemnation from the other investors, who thinks that this
time he was doing a big mistake. But anyway, LKH is not affected at all, and I
think this kind of mentality, once again, that makes LKH is successful as he is
now.
If you have your own opinion about BUMI and of course Lo Kheng Hong himself,
you can write it via the comment section below.
Any inquiries about investment in Indonesia Stock Market? Please send an email to teguh@averepartners.com.
Any inquiries about investment in Indonesia Stock Market? Please send an email to teguh@averepartners.com.
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