A Great Value Opportunity
    Category: Column By : Teguh Hidayat Read : 1026 Date : Thursday, August 11, 2016 - 08:17:19

    In 2015, when the rupiah fell as low as Rp 15,000, dozens of listed companies had USD-denominated debt, usually in the form of bonds issued in Singapore. Thus, many reported foreign exchange losses due to the increase in the value of the bonds. In some cases, the losses were large enough to wipe out the company’s operating profit, and of course its stocks fell.

    One example was Gajah Tunggal (GJTL). On February 6, 2013, the company issued bonds worth $500 million, or equal to Rp 4.8 trillion, based on the exchange rate at the time ie Rp 9,700. By the end of 2013, the rupiah had already fallen to Rp 12,200, so the value of bonds rose to Rp 6.0 trillion, and the value difference of Rp 1.2 trillion was recorded as a currency loss. This change eroded GJTL’s operating profit, so the company only posted net income of Rp 120 billion in 2013, a sharp drop from 2012’s Rp 1.1 trillion. So you may guess: GJTL stocks tumbled, from Rp 3,500 to below 2,000 per share.

    Two years later, the rupiah continued to drop. So at the end of 2015, based on the exchange rate of Rp 13,800, the value of GJTL’s bond debt (which in essence would remain unchanged at $500 million) rose to Rp 6.8 trillion, and the company reported a net loss of Rp 313 billion for the year. While the stock? Tumbled to as low as Rp 500 per share!

    Let’s look at the facts. Although GJTL booked huge currency losses larger than its operation income in 2015, those losses are merely in accounting terms, or in other words, the company did not actually lose any money. GJTL would lose money if its bonds had to be paid off, but the bonds don’t come due until 2018 (and the company has been able roll over the debt into new bonds in the past).

    In fact, the company’s revenue and gross profit has continually risen from 2010 to 2014. Profit only fell slightly in 2015 because of the overall slowdown, but last year the company still booked a positive cash flow, and also had no problems with its bond interest payments. In short, though GJTL looked bad in accounting terms, in reality the company was still making money, and its operations were still running smoothly without significant issues.

    What’s really interesting is that at Rp 500 a share, the stock is only valued at a PBV of 0.3 times, or in other words, you only need to pay Rp 30 to acquire assets worth Rp 100. Actually, I could hardly believe it: how could the shares of the largest, most established, and most famous tire company in Indonesia, and one of the largest tire companies in the world, be so undervalued. But then I remembered that the stock market is often irrational.

    So, assuming the rupiah strengthens against the dollar, the book value of GJTL’s bond debt will drop (in accounting terms), and the company will post a “currency profit,” and its net income will be positive once again. Investors will buy the stock and it will rise. So GJTL became a stock that we started to accumulate while still in the 500s, while continuing to track the rupiah’s value. Luckily, entering 2016, the rupiah has slowly but surely recovered to around Rp 13,000. As you might guess, GJTL posted a net income of Rp 338 billion in this year’s first quarter, and its shares quickly began to rally. When this article was written, GJTL is already trading at Rp 1,150 per share, more than doubling in six months.

    The big question is whether this rally can continue. The answer is very simple. You see, GJTL posted a net loss in 2015 due to the rupiah’s fall, but entering 2016, the economy is slowly but surely recovering. Inflation has begun to stabilize, and the rupiah has also stabilized, and could even strengthen. If this trend continues, as I think it will, then GJTL’s net income will remain positive until the end of this year.     

    GJTL’s core business remains strong: it is the main supplier of tires for some of Indonesia’s best selling cars such as the Avanza-Xenia, Ayla-Agya, Suzuki Ertiga, Chevrolet Spin, Honda Jazz and Suzuki Karimun Wagon R. Car sales have started to climb in line with the economic recovery, plus automakers are selling models at more affordable prices. Thus GJTL, which has grown tire sales since 2010, should continue this trend into 2016 and beyond.

    Although already up signficiantly, GJTL is still trading at a PBV of only 0.7, and remains undervalued. If the company posts a net profit (because most investors only read the financial statement, without looking deeper into the details), then the shares are likely to rise further. A friendly reminder, in early 2008, the rupiah also dropped from Rp 8,700 to Rp 12,000, and GJTL posted a net loss because of its dollar debt. In 2008, during the global crisis, GJTL’s shares tumbled as low as Rp 200, which reflected a PBV of also 0.3. Just two and a half years later, the stock rose as high as Rp 3,500 per share, generating profits of more than seventeen-fold!