James Morton of Santa Lucia Asset Management presented his approach to value investing in Indonesia, along with his investment theses on several Indonesian equity ideas, at Asian Investing Summit 2018.
Erajaya, the market leader in mobile phone wholesale and retail in Indonesia is roughly 2x the size of the second largest competitor. Since mid-2017, the government has been cracking down on illegal imports. ERAA is the biggest beneficiary of this and recently cemented its leadership position with exclusive representation of Xiaomi. Erajaya trades at 10.5x historic earnings versus over 20x in 2012-2013, and at about book value versus a high of 4x. Expansion into related services of insurance and microfinance should add a material new source of income in 2019, and that is not yet in analyst forecasts.
Puradelta Lestari owns the largest land bank in the country zoned for industrial use with its main asset less than 40 km from Jakarta. Puradelta is the only operator with enough hectares to sell large blocks. A strong balance sheet with net cash supports a trailing yield over 7%. Earnings forecasts put the business on a current P/E of 9.5x compared to potential 20% earnings growth. The current valuation is only 25% of our internal estimate of its Marked to Market Net Asset Value.
Clipan Finance is the multi finance subsidiary of the Panin Group. After several years of balance sheet stagnation and earnings decline, the company got new management and a new strategy in Q4 2016 : notably all the new car finance business from its parent. That business lost money last year but should break even in 2018, and make a hefty profit in 2019. Loans grew over 60% and operating profit over 30% in 2017. A historic P/E of 5.4x should fall close to 4x this year. Meanwhile its Price to Book of 0.32x compares to peers at over 1x and the sector leader at 2.5x.
Pembangunan Perumahan Persero is the second largest contractor in Indonesia, a country with a shortage of infrastructure where investment has a positive multiplier. The company has the strongest balance sheet in the industry (net cash) so is best placed to take on new projects. The current backlog of over IDR 63 trillion secures 3 years of revenue. Its P/E ratio has fallen from a peak over 40x in 2014 to less than 10x current year’s expected earnings against medium term annual growth in the high teens. The stock also trades at a discount to the Sum Of its Parts as it unlocks value by spinning off property and earth moving subsidiaries into separate listed entities, with another spin off expected in 2018.
Bank CIMB Niaga, the local subsidiary of Malaysian group, CIMB, is the fifth largest bank in Indonesia and second largest private bank. After suffering from the commodity collapse, the bank cleaned house, got rid of most bad debts and adopted a strategy of focusing on premium clients. Since 2016 Niaga has reduced NPLs, cut costs and automated, closing branches and becoming a local leader in digital and mobile banking. This is a recovery story with 2017 net income up 40% over 2016 but still below its profit in 2011 to 2013. Niaga trades at a current year P/E below 10x versus expected earnings growth in the mid-teens and at less than 0.8x book compared to the sector average of 2.6x.
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About the instructor:
James Morton founded the business and is CIO at Santa Lucia Asset Management in Singapore. He has over 35 years’ experience in financial services, and over 20 years in portfolio management. He set up the Chelverton Fund, a global micro-cap equity fund in April 1994. That fund merged into Cundill International in April 2002. He has specific responsibility for Mackenzie Cundill Recovery, which is managed by Mackenzie Financial Corporation. The Recovery Fund won Morningstar Global Fund of the Year in 2003 and 2005, and the Morningstar Canadian Investment Award for Best Global Small/Midcap Fund for 2010. It also won the Lipper Global Small/Midcap Fund of the year in 2009 and 2010. James Morton’s previous employment includes experience at Bain & Co, Arthur Young, Citicorp and Samuel Montagu. He holds an MBA from Stanford Graduate School of Business, an MA from Stanford Food Research Institute, and a Law Degree from Cambridge University.