You can contact the author (Teguh Hidayat) by email, teguh.idx@gmail.com. The author live in Jakarta, Indonesia.

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Surya Toto Indonesia

The stock of PT Surya Toto Indonesia, Tbk (TOTO) is probably not popular in the stock market because of its illiquidity, but the corporate name is very well-known as a producer of sanitary wares such as toilets, bathtubs, sinks, and the like, while the brand of 'Toto' itself is already a quality assurement for toilet wares. Companies with strong power of brands such as TOTO are usually ideal for long-term investments. So when the stock instead fell continuously from 700s until 300s in the last three years, I wonder what's wrong?


The history of TOTO began in 1968 when the company, which was then called CV Surya, became the authorized sole agent for sanitary products of Toto Limited Japan (TLJ), a world-class sanitary wares producer from Japan, in Indonesia. In 1977, TOTO obtained a license from TLJ to make its own sanitary wares while still using the brand 'Toto', and the company name changed to PT Surya Toto Indonesia. The company's first factory, which was the result of a joint venture between TOTO and TLJ, was established in 1978 with 65 employees. Only two years later, in 1980, TOTO was able to export its products to overseas. In 1985, TOTO built another factory that specialized in producing fitting wares such as water taps and showers. And in 2006, TOTO built its third factory that produces kitchen equipment and household products, as an effort to diversify the business. All of the three factories are located in Tangerang, Banten.

And either because of the influence of TLJ as one of the company's shareholders (currently TLJ still holds 37.9% of TOTO shares), or due to other factors, but TOTO's management is a traditional type: Make products and sell it later, never take excessive debt, and during this time the company has almost never conduct any expansion/acquisition, but only continues to develop their types of products. Even for the factory that produces kitchen equipment, until the second quarter of 2018 the contribution was still small, ie less than 5% of the company's total revenue. Actually in this 2018, TOTO has finished constructing its fourth factory located in Surabaya, which also produces sanitary wares, but we do not know yet about how much it will contribute to the company's revenue.

Then related to the company's performance, the ebb trend in the property industry since 2013 caused TOTO's net income to stagnate (as the property developers were the main buyers for sanitary wares), and the company's income dropped significantly in 2016 (although in 2017 it grew once again, but the figure is still lower than the incomes in 2014 and 2015). However, since 2017, TOTO management has predicted that, considering the increase of sale of apartments and houses for the middle class during that year, the company's revenue and net income in 2018 is likely to increase. And indeed, until the second quarter of 2018, TOTO posted a net profit of Rp145 billion, up 32.1% over the same period in 2017 of Rp109 billion, and there is an opportunity that TOTO's profit in 2018 will grow significantly for the first time since 2013 (between in 2013 - 2017, TOTO’s highest net income was Rp295 billion in 2014, while for this year the company had the opportunity to book profits of more than Rp300 billion). If this projection is true, then TOTO offers handsome profit if we can hold the shares say for the next 2 – 3 years.

Then how about the stock? If it's true that TOTO is that good, then why the stock continued to fall since November 2015 ago?

To answer the above question, first we have to look at the stock valuation: Five years ago, namely in October 2013, TOTO price were at the 380 level, which based on the number of outstanding shares at the time (9.9 million shares, adjusted to stocksplit) and also the value of company’s net equity (Rp1,036 billion), the PBV is 3.6 times. Because the ROE was then very good at 22%, while the TOTO brand was also very popular, but on the other hand the shares were not liquid (only 7% of TOTO shares owned by public investors), thus the PBV was fairly reasonable: Not undervalue, but not expensive either. But what is clear is that since TOTO had previously increased quite a lot, that in 2010, or three years before, TOTO's stock was still in the 100's level, so normally it wouldn't go further aka would 'rest', at least for the next few years.

But after the company surprisingly posted a profit of Rp296 billion in 2014, a significant increase compared to Rp236 billion in 2013 (surprising, because in 2014 the property sector began to slow down), and TOTO’ ROE also jumped to 26%, so investors bought the shares en masse, and as a result TOTO continued to rise until it touched 715 in November 2015. At this point TOTO was already overvalued (PBV 5 – 6 times), so it was easy to guess: If the company’s net profit falls even just a little, the stock would be down easily. And indeed, as the company's profit dropped to Rp285 billion in 2015, and continued to dropped to only Rp169 billion in 2016, the stock continued to fall to as low as 264, August 2018 ago.

But interestingly, after reached 264 as its lowest point, TOTO later rebound quickly, and now it's at 328. Why is that? Well, first of all it's probably because investors realized that in this 2018, the company's performance began to rise significantly, and most importantly TOTO's valuation has also begun to be reasonable, or even undervalued. Yup, at the price of 264, TOTO’ PBV and were only 1.5 and 9.4 times respectively, relatively low if you consider the power of brand ‘Toto’, while the company's financial performance also started to grow once again. TOTO's stock price today is also not much different than its price five years ago, which means that when I said that ‘TOTO would normally take a break/the stock wouldn’t rise until the next few years', then the statement was true. But because in the last 5 years TOTO has passed its 'break' period, it means that in the next 5 years the stock has the opportunity to continue to go further, of course with the assumption that its good performance in this 2018 will continue in the following years.

In conclusion, if you are looking for a safe stock for long-term investments, which is not easily affected by the rise and fall of the Jakarta Composite Index (JCI), plus bonus decent dividends, then you can consider to buy TOTO (TOTO pays around 40 – 50% of its annual net profit as dividends), especially since the increase in the last two months is also confirming that its long term downtrend is over, which with the assumption that the company is able to maintain its current financial performance, then the no way the stock will break onto a new low. On the other hand, TOTO’ PBV at the price of 328 is 1.9 times, not as low as yesterday when it was still in 264, and if there are stocks that have risen more than 30% in less than 3 months, it would have the risk of ‘cooling down’ or ‘pullback’. So to reduce the risk, you can divide your funds into three parts, where the first part can be directly used to buy TOTO at the current price, while the second part is for average down if the stock slides to Rp290 – 300 per share.

And the third part is to buy it once again at around the beginning of 2019, that is, if the company is able to maintain its increase in net income. After that, you could just hold it as long as possible. Good luck!

For the next week we will discuss the prospect of Duck King’s IPO.

Any inquiries, send email to teguh.idx@gmail.com.

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