'Wonderful Company at a Wonderful Price'

Warren Buffett once stated one of his famous quotes: "It is far better to buy a wonderful company at a fair price, than a fair company at a wonderful price." If we notice, in the sentence Buffett stated that in selecting stocks to buy then we have to choose one best factor, whether it is the lowest possible price, or the highest quality of the company's fundamentals. Is almost impossible for any value investor to be able to find a company with a very, very good fundamentals, but on the other hand it is sold at a very, very low price. So, in this case, Opa Warren prefers 'wonderful company at a fair price'. Not necessary low price, as long as not too expensive.

But hey, what if we could find a stock like that? That is, a very good stock which is sold at a very low price?

Although it sounds a bit absurd, but in fact in the Indonesia Stock Exchange, there are sometimes stocks like these. For me personally, it is a challenge to find it. Because, once I found it, all I need to do next is to click the ‘buy’ button only, then I can sit for months or even years to come without doing anything else!

One of these shares is Mandala Multifinance (MFIN). For those of you who prefer trading in blue chip stocks or liquid second liners, MFIN may sounds unfamiliar. But for us as the followers of value investing, MFIN is our hidden pearl! Because it is wonderful both in terms of value, and the quality of fundamentals (we've discussed this company before, you can read it here). There are only two drawbacks in the stock. First, it is illiquid. So if you are interested to buy MFIN then you have to have a commitment to hold it for the long term, ie one or two years or so. And second, the company’s name is not well-known enough, even for local professional investors. Everyone is probably familiar with the name Adira Finance (ADMF) as the largest motorcycle financing company in Indonesia. While ‘Mandala’? Instead of Mandala Multifinance, the people is more familiar with the name of Mandala Airlines, a once airline company (though both companies, as far as I know, do not have any relationship).

However, when I said that this MFIN is 'a wonderful company', it wasn’t empty talk. First, since the very beginning, the company engaging in a relatively easy business, ie the motorcycle financing. And although it is not the largest company in its field (financing), but MFIN is a company with the most convincing track record of growth in the field of financing/leasing. At the end of 2006 (MFIN went public in 2005), the company's net asset value was Rp245 billion  or about US$ 25 million). And in 2014, or eight years later, the net asset have grown to become Rp1.4 trillion or about US$ 130 million. This means that the average real growth (CAGR) of the compan is 24.4% per annum, net dividends, and also includes a period of crisis of 2008. While in the same period ie 2006 to 2014, the Jakarta Composite Index (JCI) has risen from 1,802 to 5,227, so its CAGR was 14.2%. Because MFIN’ CAGR is 24.4%, then we could say that the performance of MFIN is 10.2% better (on average) than the general market performance. Well, it's similar to Berkshire Hathaway, is not it?

Second, the company's net profit also continued to rise in the long term without ever even dropped, from Rp51 billion or US$ 5 million in 2006, to became Rp301 billion or uS$ 30 million in 2014. On the operational side, MFIN performance also continues to increase, from 100 thousand units of financing in 2006, to around 600 thousand units in 2014, while so far the management has never talked much about its business expansion activities, even in its public expose materials. So this company is silent but deadly, is not it? It could be said that in each year, the company expects to grow conservatively by 20 – 25% only, by setting up new office branches etc. But when the conservative targets has been consistently achieved each year, then in the long run the compouding results were remarkable!

And third, the management of MFIN is a simple and easy one (the company structure is very simple, MFIN does not even have a subsidiary), running its business as it is (MFIN always focus as a motorcycle financing company), and really mastering the field (which perhaps because sir Alex Hendrawan, one of the company’s main owner and also the company’s president commissioner, has started his career in the business motorcycle leasing since he was very young, which is in the 70’s). When I read the company’s annual reports from 2011 to 2013, the management rarely complain or argue about 'the unfavorable business conditions' or something.

About the funding, one of the problems of financing companies is their reliance on bank loans, where the cost of funds will increase if the bank raised the interest, for example, if the BI Rate increased. That's why, as well as other financing companies, MFIN keep trying to find other funding sources, and they managed to do it. In 2012 and 2014, the company issued bonds and medium terms notes (MTN) for the fist time with a coupon of 8 – 11.25% per annum, or cheaper than the bank interest of 12 – 14% per annum. Although the value of issuance is still very small, which is only Rp200 billion or about US$ 20 million (while the company's bank debt almost reached Rp3 trillion or US$ 300 million), but this is a door opener for the next bond issue which can be larger. If MFIN can maintain its current growth rate and reputation over the next years, the company also can employ the strategy of Adira, who taken half of its funding from the issuance of bonds, and the other half in the form of bank debt.

Beyond the factors mentioned above, I can look directly in the field that the branch offices of Mandala Multifinance can be found in almost every city that I visit, while in two or three years ago, the offices were hardly to find. Apparently, the company routinely increase the number of new offices, which in 2013 MFIN added 15 branches, in 2014 another 18 offices, and in this 2015 the company may set up 25 new offices. MFIN is now serving Banda Aceh to the Moluccas. This is reminded me with the branches of Adira that also can be found everywhere, so that people become familiar with the name 'Adira'. The point is, though MFIN is not a big and well-known company, but it should be only a matter of time before the name of 'Mandala' will be aligned with 'Adira' as one of the leading brands of leasing business in the country. It is understandable if MFIN appears to be a nameless company when compared to Adira, because when Adira was established by Theodore Permadi Rachmat, one of the richest men in the country, MFIN building its realm from absolutely zero. But we'll see both of their progress in a few years from now on.

And what about the shares?

At a price of 925, based on the company's financial statements for the period of full year 2014, MFIN’ PBV is 0.9 times only, aka very low if we consider its track record of growth that is very significant and consistent, while on the other hand the size of the company is still relatively small so the room for further growth is still wide open. With such criteria, then a minimum PBV for MFIN should be 2.0 times. So in terms of the valuation, the potential upside in the stock is very significant.

However, we have already mentioned above that MFIN has two shortcomings, namely the company brand that is ‘nameless’ (if you are not from Indonesia, be frank, have you heard about ‘Mandala Multifinance’ before?), and its shares are also illiquid. Other point that also must be considered is, the average PBV in the financing sector is actually low, which is only about 1.0 times (which is probably because the majority of investors consider that the financing sector is quite risky, just like the banking sector. But like the banking sector itself, financing sector proved to be able to continue to grow in the long term, both in favorable and difficult economic conditions). There is only one stock in this sector with ‘normal PBV’ ie above 2.0 times, namely Adira. While the rest stocks including MFIN, the average PBV was only 1.0 times or even less than that.

So although I can say that this MFIN is 'a wonderful company at a wonderful price', but it may be difficult to imagine that the shares will increase significantly in the near future. But still, undervalued is undervalued. If you could commit to hold it within one or two years ahead, your MFIN will never let you down. Exactly a year ago, MFIN was in a position of Rp700 per share, but today the stock already stand on 925. That means, the capital gain was more than 30 percent! And it is in line with the growth of the company's net asset value, so its PBV is still low even though the share prices have gone up a lot.

But again, the gain of 30% was probably on the paper only because you would find it hard to sell this MFIN at once, because of the liquidity problems, especially if you hold it in large quantities. So, if you are interested in getting into MFIN, then you probably do not need to buy too much, but only to the extent of the amount of money that you can keep it as long as possible. On the other hand, because we do not know when will the JCI go down, or what if the other stocks we bought turned out to generate a loss, then this MFIN is still a better option to be picked because the shares relatively immune to the effects of fluctuations in the JCI, and although it would take long enough of time, but in the end it will always rising steadily. In the above we already mentioned that in the last year MFIN has gone up more than 30%. And believe or not, if the period is extended to the last five years, the shares have gone up an average of 27.0% per annum, or approximately aligned with its real growth of net assets. Not bad, eh?

Disclosure: When the article was published, Avere Investama (Teguh Hidayat & Partners) is in a position of MFIN on an average price of Rp790 per share. This position can be changed at any time without prior notice.

Any inquiries about investment in Indonesia Stock Market? Please send an email to teguh@averepartners.com.