When the Government launched the package V of
economic policy, one of the policies is tax incentives for companies that
perform asset revaluation. Normally, the company must pay income tax of 10% for
the increase in value of assets due to revaluation (the difference between the
value of assets before and after the revaluation is considered as corporate earnings),
but now the tax is 3 – 6% only. This policy is expected to encourage companies
to revaluate its assets such as land, buildings, etc, where the value of these
assets will usually rise, and eventually raise the value of net assets/equity
of the company as a whole.
And if the net asset value of a company rises, the
valuation of its shares, in this case its PBV, becomes lower, so that the stock
will have a fundamental reason to rise. The increase in net asset value also
caused the ratio of debt to equity to fall, so that the company can apply for a
larger loan to the bank for expansion, and for the bank itself it means that
its lending will grow, as well as its revenue and net income. Everybody’s happy!
But that is the optimism theory, which is believed
by many people only because the Jakarta Composite Index (JCI) was in a very
optimistic phase after rallying for more than 10% in last October. I mean, if the
JCI was still slumped just like the end of last September, then this Government
policy about the asset revaluation will not gain much attention from investors
(so there is a psychological factor here). Because if you look closely, the
incentive is not so special, because only in the form of income tax cuts from
10% to a maximum of 3% (7% discount), and even the discount is only applied to
companies wh have filed the revaluation prior to December 31, 2015. While if
the revaluation is filed prior to December 31, 2016, the income tax became 6%,
or in other words, the discount is only 4%. If I was a controlling shareholder
of a public company, frankly it is not a very attractive incentive because on
the other side, the revaluation process itself is not cheap (to pay for appraisal
services, etc.). Had the income tax abolished at all, or there was an
additional incentive in the form of certain discounts for the process of
revaluation etc, only in that way I will perform the revaluation.
By the way, what does it mean to the revaluation
of assets?
In accounting, when a company acquires an asset,
for example a piece of land, then in the financial statements, the value of the
land will be reported in accordance to its acquiring price. So if Ciputra Development (CTRA) acquired the
land area of 100 hectares in the city of Surabaya worth Rp100 billion in
2005, and until today the land hasn’t been developed, then so be it, in the
company's latest financial statements, the value of the land will still be
reported Rp100 billion (less or more), although the sale value of the land in
2015 could be increased several fold. If the management of CTRA revaluate the
land, its fair/market/current value may increase to say Rp300 billion, which is
reported into the financial statements, so that the equity value of CTRA will
be increased by Rp200 billion (not including income tax, fee for appraisers,
etc).
The question, if revaluation could easily raise
the value of net assets/equity, then why does the company do not revalue their
assets every year? Well, that's because there are a lot of things. First, the
revaluation process was complicated and long (there are many terms and conditions),
so unless it is absolutely necessary, management will not perform it.
Second, most companies will only revalue its
assets if, 1. the Company will be merged or acquired by another company, 2. The
company is in huge debt so that it have to sell one of its assets, and for the
purpose of negotiations with a potential buyer, the asset will be revaluated to
find its fair value, and C. The company will pledge its assets to obtain loans
from banks.
In short, if the owner had never intended to sell
or merge the company with other companies, either partly or entirely, and is
not having problems with debt, and also not trying to apply for a loan to the
bank, then there is no reason to carry out a revaluation. Logically, if the
company revalue one of its assets, say a piece of land to so its (reported)
value increased from Rp100 billion to Rp200 billion. But because the land is
not actually sold at the price of Rp200 billion, the company did not really gain
any money, while on the other hand it should pay taxes, etc, in cash. So in this
case the company is suffering loss instead.
And third, there is a risk of an error in the revaluation
process itself, where the new value of assets may not really reflected the
actual value and, thus, the company's reputation will be at stake.
But, okay, let's say a company revalue its assets
so that its equity/book value increased, thus the share valuation becomes
cheaper, and the stock supposedly going up, right? Well, not necessarily. If book
value of a company rise while the value of earnings remains, its ROE will
dropped, and it would look bad in the investors point of view. At the end, for
investors, the important thing is that the company able to generate a large and
growing earnings. It is odd if the value of company’s assets suddenly increased
because of revaluation while company's earnings stay low. The easiest example is
Indospring (INDS), a motorcycle
sparepart company which performed revaluation of assets in 2012 and subsequently
its book value jumped sharply. But the stock still slumped because of poor earnings
of the company, so that the people do not care about the stock despite, in
terms of PBV, INDS was very very cheap.
 |
| Logo of PT Indospring, Tbk. Believe it or not, currently its PBV is less than 0.1 times. |
In conclusion, I don’t think that this Government
policy will have much effect on the stock market as a whole, and will soon be
forgotten if later the JCI dropped once again.
Actually, this is not the first time where the Govt
policy is responded excessively by investors. When the other day the Government
released policies of reduction in cement prices, gas prices, the decline in interest
of subsidized mortgage and so on, the stocks of related companies dropped
heavily, while the policies are not necessarily have a negative impact. On the
other hand, when there was a rumor that the Govt, through Aneka Tambang (ANTM) will acquire the divested shares of PT Freeport
Indonesia, ANTM stock immediately rose high though later it fell back to even
lower positions. But in these cases the investors with keen instinct might gain
some profit when they bought a good stock that fell due to government policies
that allegedly have a negative impact to the company (I myself quite often to
do this), or otherwise, to sell their shares in exorbitant prices when there was
a ‘positive’ policy. And the tips to do that: Do not rush, always learn any Government
policy in detail and carefully, before take conclusions/decisions. Sound
complicated? Well, not really :)
Any inquiries about investment in Indonesia Stock Market, please send an email to teguh@averepartners.com
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