Cipaganti Citra Graha

After had difficulties in paying the interests and the principal capital belonged to their investors for a few months, the authorities of law enforcement finally intervened the ‘fraud case’ of Cipaganti Cooperative (Koperasi Cipaganti). The Police of West Java set the status of suspects to Andianto Setiabudi, Julia Sri Redjeki, and Yulinda Tjendrawati, all of them are primary caretakers of the cooperative. Because the three persons are also members of the board of PT Cipaganti Citra Graha (CPGT), in this case the president director, president commissioner, and commissioner, the case caused the stock of CPGT to fall to 54, down more than 70% compared to its IPO price of 190, before then rebounded to Rp75 per share as its current position.

About the cooperative, frankly, I don’t actually care, because I never participated in that kind of ‘investment’. But the question is, what if I bought the stock of CPGT at its upper price? And for investors who have not yet hold the stock, is it the time to buy the share because of its attractive valuations, with PBV that only 0.4 times?

At the beginning, Cipaganti was a company engaging in trading of used cars in Bandung, West Java, established in 1984. After some time, the company entered the business of leasing of cars and heavy equipments, and Mr. Andianto (the founder of the group) set up PT Cipaganti Citra Graha (CPGT), but not all of the group’ business is placed under CPGT (Mr. Andianto also have hotels). When the company went public in 2013, the Group has engaged in many areas of business, but CPGT hold the following businesses: 1. Travel & shuttle, 2. Travel service, airplane ticket purchasing services, and rental of tourist bus, 3. Car rental, 4. Courier and cargo services, 5. Taxis, and 6. Rental of heavy equipments.

If concluded, CPGT primarily engaged in the businesses of transport services, heavy equipment rentals, and tours. In the first quarter of 2014, CPGT had revenue of Rp139 billion which Rp110 billion of them came from transport services, so it might be argued that the business of heavy equipments and tours only contribute a little to the company's overall revenue. And this is interesting considering the composition of the company's fixed assets, where the book value of heavy equipment assets of CPGT was Rp464 billion, or only slightly smaller than the value of vehicle assets of Rp613 billion. Meaning? The return or revenue derived from heavy equipment rental business of CPGT is much less than the transportation service business.

And if the small revenue eroded by depreciation of the equipments leased, then holaaa.. the profit became negative aka loss. And indeed in the First Quarter of 2014, CPGT had Rp3 billion of loss from the business of heavy equipments, where the condition has occurred since 2013 (in 2012, the heavy equipment still made a small profit).

Like I once said, the business of vehicle and heavy equipment rentals is not prospective for long term investment because of one of its fixed cost: Depreciation of assets. A car rental company may have no customer in a certain period, but the depreciation of the car wouldn’t stop. This business is also requires a lot of leverage (read: debt) so that the company could own more fleet than if they buy vehicles with their own money. However, because the net profit margin of CPGT is relatively small, ie less than 10% of its revenue, then the company should face the risk of loss if the bank raised its lending rate at any time, as the majority of the loans have floating lending rate.

Conjunction with the Cipaganti Cooperative

Okay, CPGT may not attractive for long-term investment. But obviously the stock is now priced at Rp72 per share, that represents PBV of 0.4 times only. Imagine, at the current share price, the overall value of the company is only Rp260 billion, far less than the paid up capital of the company that is Rp361 billion, not including the accumulation of retained earnings! So if a person acquires 100% stake in CPGT at its current price, then he decided to immediately liquidate the company by selling its entire assets of vehicles, heavy equipment, and so on, then using some of the generated cash to pay off the company’s entire debt, the remaining cash would be sizable to make a significant profit.

And for retail investors/traders in the stock market (who will not acquire the entire company), CPGT may produce some great gain if the above legal problem was completed, and its stock was rising back. In fact, if there were traders who dare enough to take this CPGT at the price of Rp50’s per share, then their gain is now more than twenty percent. But let us look at the case of the Cipaganti Cooperative.

Cooperative, as we’ve discussed here, is a type of legal entity that is much simpler than the limited liability company (Perseroan Terbatas/PT). But just like a PT, a cooperative could obtain funding from third parties. If you have a PT, then through the PT you can apply for a loan to the bank, issuing stock, holding an IPO, and issue bonds. However, the process is not easy. When you want to apply for a loan to the bank, for example, then you must provide the company’s assets as collateral, and the PT should have been in operation for a number of years with a verified track records.

However, the same does not apply to cooperatives. A cooperative is not a company, so that you do not need to issue shares. If you manage a cooperative, then as long as you can convince potential investors to place their funds in the entity, then holaaa.. you got the money! You do not need to give any assurance to the investors, but only a letter of promise or such.

The problem is, for a cooperative, the interest expense is usually very large. You will not be able to attract investors to put their money in your cooperative if you do not offer huge interest, say 2% per month, or equivalent to 24% per year (Cipaganti Cooperative itself offers interest up to 1.95% per month). While if you borrow from a bank, the interest would be 12 - 14% only. If you successfully issued bonds, the interest rates could be lower than 10% if you make it abroad (in Singapore). But it is fair if a cooperative is 'forced' to offer huge interests to investors, because they do not provide any collateral, except a letter that contains promise that in the event of a loss, then the cooperative will liquidate/sell their assets to return the capital to the investors.

Because of this interest issue, if an entrepreneur could obtain a source of funds in other ways which do not burden him with great interest, then of course he does not need to continue his cooperative. For example, if I successfully obtained a loan from a bank at an interest rate of 12% per year, then why the fuck I still have to pay 24% of interest to the clients of my cooperative?

And I think that this is the mistake committed by Mr. Andianto Setiabudi, the founder and owner of Cipaganti Group. When he was successfully brought CPGT to the stock market in 2013 (make no mistake, it is not easy to hold an IPO), he still continues to maintain its Cooperative. Take a look at the other major employers: Is there anyone that running cooperatives, if the purpose is to raise funds from the public, when they've successfully brought their company to the trading floor?

Or maybe Mr. Andianto was already intending to dissolve his cooperative, but the timing is less precise where in 2012 and 2013, the Group experienced some setbacks in their business so he could not immediately dissolve and liquidate the assets of the cooperative. When Mr. Andianto and his two relatives eventually named as suspects, I think it was the culmination of the wrong timing.

Will the stock (CPGT) rise again?

However, the fraud case is already happened, and Mr. Andianto along with his ‘Cipaganti’ has now changed from 'inspiring entrepreneur' to 'a suspect of fraud'. Perhaps this is what Warren Buffett meant by 'It takes twenty years to build a reputation and five minutes to ruin it'. Related to the fall of CPGT in the market, the stock may rise back or fall further depending on the following:

First, regarding the case of 'fraud' committed by Mr. Andianto (maybe we should quote the word ‘fraud’ here,  because if you look at the good reputation of Mr. Andianto, it is difficult to believe that he was a fraudster, only got bad luck), there are two possibilities of settlements, 1. Mr. Andianto along with two other suspects are actually sent to prison, or 2. The three suspects convicted with fines and restitution, but not to jail. But I think both possibilities would give negative sentiment for the stock of CPGT. If Mr. Andianto imprisoned, then CPGT must choose a new president director, while so far it was because of the role of Mr. Andianto only, that CPGT became a great company. So whoever his successor later, then it will raise doubts that the new president will be able to lead the company, especially when the trend of the company's business is being decreased like today.

But if Mr. Andianto not going into jail, then it will also cause a bad sentiment because this is not the first time when a suspect of fraud cases that cause financial loss to many people, eventually escaped from the threat of confinement. It is certain that there would be allegations that Cipaganti bribe the police and the like, do not care if Mr. Andianto pay compensation to all investors of the cooperative (still remember the case of a car accident that involving Rasyid Radjasa? The youngest son of Hatta Radjasa also continued to receive bully from the public simply because he was not imprisoned, although his father already paid compensation to the victims of accident).

That was the first, related to the settlement of the case were 'completely wrong'. Secondly, in the First Quarter 2014, CPGT net profit was fell about 65%, and this downtrend will probably continue in the upcoming Second Quarter because the company certainly needs time to increase their income back, especially when at the same time, its President was busy dealing with the police. So when the company released its second quarter financial report at the end of July, where its performance is actually deteriorating, then it will be another bad sentiment for the stock.

The point is, it's hard to see that the price of CPGT will rise back to the position before he fell, except: 1. Mr. Andianto et al, somehow, successfully settle his case with a positive settlement, for example, he does not get into jail, and announced through the media that Cipaganti Cooperative Cipaganti eventually managed to pay all of its obligations to its customers, so the reputation is recover, and/or 2. CPGT sell some of its assets then received some money as income, so the net profit will rise.

Well, when CPGT was successfully rise in the last week, it is likely because of the event number 1, which Mr. Andianto had successfully (at least until recently) run his case with a good deal, and it was a positive sentiment for the stock. At the hearing held on July 3, Mr. Andianto expressed readiness to settle all obligations of Cooperative Cipaganti to its customers, by submitting the cooperative-owned assets to the court for later liquidated. Because in the past the Cooperative always show a good faith by holding regular meetings with its investors (so the management did not run away), then the statement of Mr. Andianto had momentarily relieve the concerns of the customers. If later the liquidation process of the assets of the Cooperative have completed without a hitch, and all investors receive their capital back, then CPGT will continue its rise. However, you have to be careful if it turned out that the cooperative did not have enough assets to pay compensation to its investors, or the like. What is to remember here is that the Cooperative did not pay any compensation yet, and Mr. Andianto is still have to dealing with the police and the courts.

Another thing that might be interesting to note is, since July 2013 until April 2014, PT Cipaganti Global Corporindo as the majority shareholder of CPGT has sold its shares to the public in the price range of Rp160 - 255 per share. Is it also aims to raise funds to pay the investors of the Cooperative? We'll see.