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.
- 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.
- 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.
- 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.
- 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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