An Investment Opportunity in a Growing Industry of Internet
    Category: Column By : Teguh Hidayat Read : 936 Date : Monday, May 09, 2016 - 04:46:44

    Warren Buffett once said in 1960s: “We like to buy companies/shares at a price that is so low, that when we sell it later at a price that is not too high, we will still generate a significant profit.” But one or two decades later Buffett realized that if some shares are sold at a low price, then it’s usually the share of a second-class enterprise which is not feasible to invest, so he then changed his strategy into “buying wonderful companies at fair prices.” But what if I told you that, in certain circumstances, you have an opportunity to buy a wonderful company at a wonderful price?

    Along with the economic slowdown in recent years, the Jakarta Composite Index (JCI) also has not risen substantially since 2013, the year where the index touched the level of 5,250, but when this article was written, it is still stuck at the level around 4,800s. However, there are many stocks that have declined significantly since 2013, some of them even fell by more than 90%, and their status dropped from blue chips into penny stocks. To be sure, the companies behind many of these degraded stocks have poor financial performance, but the others are actually not that bad, where they are still operating normally without many problems.

    One of these companies is PT Erajaya Swasembada (ERAA), the largest mobile phone distributor in Indonesia. In April 2013, ERAA once traded at Rp 3,400 per share. But a month later, after the company reported a drop in net income in first quarter 2013 (which was the first drop in five years), the stock began going down. The drop in net income was clearly caused by the impairment of rupiah, which increased the price of mobile phones that must be paid by the company to suppliers. So when rupiah continued to fall from 9,000s per US$1.00 to as low as 14,000s in August 2015, ERAA kept reporting a lower net income almost every quarter, and investors kept dumping the stock. Last August, ERAA traded at Rp 400 per share, down almost 90% from its peak.

    While most investors follow the hypothesis that: “As long as rupiah is falling, ERAA cannot raise its profits, thus the stock ain’t worth buying.” However, some value investors (like me) could look at the fact that PBV of ERAA was only 0.4 times at a price of Rp 400, an unbelievably undervalued price for a company having the status as the largest and the most well-established in its industry, which has experience in distributing mobile phone since the era of Nokia in 1990s. It is also currently operating without any significant issues or financial difficulties. The company’s President Director Budiarto Halim also won the prestigious EY Entrepreneur of the Year award for Indonesia in 2012. I mean, okay, the company’s net income has been declining since the beginning of impairment of the rupiah three years ago, but of course you don’t think that the rupiah will go down forever, do you?

    On the other hand, the increasing usage of the Internet, including the rise of e-commerce, has increased the use of mobile phones. And in contrast to a few years ago in which a few brands dominated the mobile phone market, such as Nokia, BlackBerry and Samsung, currently there is no such domination anymore. Many lesser-known brands such as Asus, Xiaomi and Oppo offer good quality products at lower prices than similar phones from Apple or Samsung. But these lower prices eventually expand the market for mobile phones. I often meet with people who have two phones: one iPhone and the other is a Xiaomi, not including tablets and laptops. Sometimes they also have more than one tablet and laptop. Amazing, isn’t it?

    The growing size of the mobile phone market caused ERAA to generate revenue of Rp 20 trillion in 2015, up nearly 40% compared to 2014 of Rp 14.5 trillion, and the net income also rose, albeit only 6.4%, from Rp 212 billion to Rp 226 billion, due to the weakened rupiah. The good news is, the rupiah seems to have hit bottom somewhere around August 2015, and is now slowly but surely beginning to rise, as inflation stabilizes at a low rate and the economy begins to accelerate.

    Internet usage continues to rise, as Internet users in Indonesia is about 88 million out of a population of 270 million, so there is still much room for ERAA to continue to market the latest mobile products. So if everything’s going well, and it looks so, ERAA will have a better performance in 2016, and of course its stock will rise.

    And indeed, when this article was written, ERAA is already trading at Rp 735 per share, up about 80% from its lowest position a half year ago. But considering that at that price the PBV was still 0.7 times, or in other words, you only have to pay Rp 70 to acquire an asset worth Rp 100. And that price doesn’t include its intangible assets such as its position as the market leader in a growing industry of mobile devices distribution. So yeah, this is an example of a market where you can buy a wonderful company at wonderful price, and this opportunity may not come again. If you ask, are you ecstatic to have such opportunities? I can unequivocally answer, yes I am! It’s now or never!