Mandala Multifinance - Best Stock in Multifinance Sector

About a year ago, Bank Indonesia (BI) as the monetary authority of Indonesia announced a rule related to minimum down payment (DP) of 20% for purchasing of motorcycle, and 30% for car. Prior to that, finance companies were aggresive in disbursing their loan, in which a buyer was able to buy a motorcycle at a price of US$ 1,200 after paying US$ 40 only as down payment. BI saw that this could provoke a bubble, so then they issued the rule of minimum down payment as mentioned earlier.

From the perspective of economic development, the purpose of the rule is clearly to avoid the bubble. However, from the point of view of the finance company, this policy would reduce the number of customers, and ultimately lowers income. Consequently, most of the stocks in the multifinance sector were dropped in the last year. Perhaps the most visible is Adira Multi Finance (ADMF), which has been dropped 25.8% in the last year.

But after my discussions with friends who work in this field, I conclude that the effect of the BI rule was only temporary. At the very beginning, the customers were shocked when they find out that they can no longer buy a motorcycle by paying the down payment of US$ 40, but it must be US$ 200 – 300, so the number of motorcycle purchases were immediately reduced. But after some time everyone is getting used to, and the number of motorcycle purchases (by credit) are gradually increase again. The fact is, that DP of US$ 200 – 300 is not a large money, is it? Even a young worker with a salary of US$ 250 per month could pay the money, as long as he is willing to save some of his salary for about six months. Similarly with car, which the middle class people should be able to understand that a DP of US$ 2,500 – 3,000 for a Toyota Avanza (which priced US$ 15,000) or the like is reasonable.

Then how about the current performance of the finance company after BI applied the rule of minimum DP, a year ago? Well, it was still quite good and still growing too, although not as fast as before. Throughout the first quarter of 2013, nine finance (or financing) companies in the Indonesia Stock Exchange recorded a total net profit of Rp685 billion, increased 6.3% compared to the same period in 2012. But because the stocks itself has dropped substantially in the last year, then its valuation is relatively low with an average PER of only 6.9 times. Here's the details:

Stocks	Price (Rp)	PER (X)	ROE (%)	ROA (%)	net profit (%)	equity (%)
ADMF	9,600	7.1	24.9	5	-7.5	6.8
BFIN	2,475	7.6	16.5	7.1	15.3	4.4
CFIN	415	4.3	14.3	7.5	5	3.7
MFIN	750	3.8	27.6	6.9	29	7.4
BBLD	740	7.4	15.4	4.6	12	4
WOMF	195	13.1	6.6	1	NM	1.7
VRNA	136	4.3	13.9	1.8	40.6	3.6
HDFA	265	66.3	3.6	0.6	-63.9	0.9
TIFA	275	6.4	18.5	4.1	1.3	4.8
Average	14,851	6.9	19.4	5.1	6.3	5.2

Note :

1. Prices as of May 7, 2013
2. Figures in the columns of net profit and equity are the growth of net profit and the growth of equity, respectively
3. Growth of net profit of WOMF is written NM (Not Mentioned), because in the period of 2012 the company had a loss
4. There were at least thirteen financing companies listed on the Stock Exchange, but the table above shows only the companies with assets of more than Rp1 trillion (US$ 100 million). Data sorted by company’s value of assets, from the largest (ADMF), to the smallest (TIFA).
5. Here are the full name of each companies: Adira Multi Finance (ADMF), BFI Finance (BFIN), Clipan Finance (CFIN), Mandala Multifinance (MFIN), Buana Finance (BBLD), Wahan Ottomitra Multiartha (WOMF), Verena Multi Finance (VRNA), HD Finance (HDFA), and Tifa Finance (TIFA).

Well, after looking at the table above, which stocks do you think the most attractive? That's right, Mandala Multifinance (MFIN)! In terms of profitability, MFIN is one of the best compared to eight other companies, with ROE 27.6% and ROA 6.9%, respectively. But on the other hand its PER was only 3.8 times. The good news, corporation’s historical performance is also fairly consistent. Here’s the data, numbers in billions of Rupiah:

Year	2008	2009	2010	2011	2012	CAGR (%)
Equity	396	473	584	725	888	17.5
Revenue	644	672	854	1,170	1,292	14.9
Net Profit	108	108	133	180	218	15.1

In terms of dividend distribution, MFIN paid dividend of Rp41 per share for the fiscal year of 2011, which reflects 5.4% of yield on a share price of Rp750 per share. The yield figure is the second best in the finance sector behind ADMF, which recorded a yield of 8.2% for the same year. However, if we consider that the asset size of MFIN is far smaller than ADMF (Rp3.8 versus 26.9 trillion), and MFIN had its net income rose 29.0% MFIN while ADMF’ net income slipped 7.5%, then MFIN is obviously more interesting to buy, at least for now.

About the company, MFIN is a finance company which specialized in motorcycle financing, particularly Yamaha motorcycle (and Honda as well, but only slightly). The company is a subsidiary of Lautan Teduh Group, a Yamaha motorcycle dealer for the region of Lampung and West Java, which has been operating for over 20 years. Although its parent company only operates in Lampung and West Java, but MFIN already operates in 25 provinces in Indonesia, with the number of branch of more than 200 offices.

So what are the plans for business development? Unfortunately, it seems that MFIN’ management is a conservative type who do not have any expansion plan. But if you look at their consistent track record in the past, then it may not really matter.

Although this MFIN is seems attractive, there are few more things that you should consider if you are interested to invest in this MFIN, or any other motorcycle financing companies. First, the sales of motorcycle in Indonesia for the year 2012 was 7 million units, down about 11% compared to the previous year. Unfortunately, based on prediction from the Indonesian Motorcycle Industry Association, in 2013 the sales of motorcycle in Indonesia is expected to fall further to around 6 million units. One cause is because the Indonesian economy continues to increase, which many people are switching from motorcycles to cars. Throughout the year 2012, the sales of car in Indonesia had hit a record of 1.1 million units. That number grew significantly compared to the year 2011, which only 894 thousand units.

Second. MFIN obtain almost all their funding from bank loans. Of the total liabilities amounted to Rp2.9 trillion, Rp2.6 trillion of which were bank loans with interest of 11 – 12.5% per annum. I think that these rates are quite low, but could become higher because at the time (first quarter of 2013), the BI Rate was only 5.75%. If the later the BI Rate was increased to reduce the rate of inflation (because if the government raise the price of subsidized fuel, the inflation rate will certainly rise significantly), then th bank rate is also likely to rise, and eventually will depress MFIN’ net income, because MFIN can not raise their interest to customers as the rate were already very high, amounting to 25 – 41% per annum.

Maybe that’s why the management of MFIN has trying to obtain alternative sources of funding by issuing bonds in June 2012, which bear interest of less than 10%. Unfortunately, the company only get proceeds of Rp100 billion (about US$ 10 million) only from the bonds. Thus, although MFIN had a fairly good performance in the first quarter of 2013, but I was not quite sure that the good performance will continue in the upcoming second quarter.

In conclusion, if you are really interested in this stock, then use only a small portion of your asses, because the shares are also not very liquid. If we look at the charts in the long run, MFIN has gained of more than seven-fold since the 2008 global crisis, but its peak was at 1,230 in mid-2011, before then continues to drop until today because of negative sentiments which we’ve discussed above. On the other hand, MFIN is the cheapest stock in the sector, making it a good choice for those of you who are value investors, as the risk is already limited.

PT. Mandala Multifinance, Tbk

Rating of Performance in Q1 2013: A

Rating of Shares at 750: AA

Original article was written at May 7, 2013