Just a few weeks ago, I have mentioned in my 2017 Updates that I have bought some units of Indofood Agri (5JS) and concentrated about one-fifth of our portfolio. Half of this amount of investment was from me, and BF decided to jump in together with me on the other half.
While we were discussing about our buy, BF asked me about the dividend yield. He uses dividend yield as a gauge to know how much “interest” he is earning from his investment. When I told him that the dividend yield was only 1.6%, he obviously had some problems accepting it because his REITs were already yielding 6-7% on average in distributions.
Of course, dividend yield is just one of the reasons why I buy a stock. The more tantalizing reason was because this business was reasonably priced.
I explained that we should be glad that Indofood Agri is giving out some dividends. Though, they could do slightly better by committing to a fixed dividend policy.
And why did I say that the price is right? It was harder to explain to BF, but I hope you get the reasons why in this blog post.
1) Low Book Value
I dug out the figures from their 2016 annual report and did some manual calculations for IndoAgri’s net asset value. Turns out, its P/B ratio is in the range of 0.3 to 0.4. What this means is that in an event that Indofood Agri liquidates all her assets and clear their liabilities, the amount that the company will be left with will be more than what I’ll be paying for by 3 to 4 times. A discount of 65%? Yum.
2) Acquisition of treasury shares
In 2015, Indofood Agri acquired 21,378,000 treasury shares in the share capital of the Company through the open market. The shares were purchased for Rp151.9 billion which is roughly 70 to 80 cents per share after accounting for currency exchange. Now, it is usually a good sign when the company buys back their own shares, as it would mean that they are reinvesting their capital back into the company, or because the market has shown that their shares are discounted.
Of course, this happened almost 3 years ago and the price still continued to drop. Would I consider this a good thing? Yes, because it just means that they are even more undervalued now, and I am paying about half of the price that they have paid initially for the buy back.
3) Cash hoarding
Cash is awesome. Cash is queen. Cash can act as a form of insurance against recession. And how much cash is the organization holding? You’d be amazed. About 18 cents per share. That’s 50% of my nibble at 37 cents. I’m basically getting half of the company for free. Is that a good deal or a great deal?
With more cash, this can lead to more options for the company. Well, they could do another buy back, or perform other forms of acquisition. They could use it to clear their debt. Or maybe, just maybe, they could give out special dividends to us. It is good to note that their free cash flow has been also improving with most of the the cash coming from strong operational activities and subsidiary income. Net increase in cash for the past 2 years.
Having said the top 3 reasons why I got vested in the stock, there are still some drawbacks getting vested. For example, earnings are heavily concentrated in Indonesia, and are subjected to currency losses. Also, their business is inventory heavy and you would see that their net profit margin is only at a mere 3.6%.
Despite also having reported higher earnings in 2017, the stock price still continued to fall rather significantly. It would seem that Mr Market doesn’t like this counter very much and has depressed its price.
Now, I remember the sting of my bleeding counter in CDG and having paying a premium for its price. It is my due diligence to never repeat that mistake again and make sure that I know now that the price that I am buying Indofood Agri for is the right one.
Only time can tell. But in the past 45 days of holding this stock, it has since appreciated 10%. I am lucky, but I don’t know when this luck will run out. I am hoping that the other shareholders and I would be greatly rewarded once its true intrinsic value is revealed. I believe that any kind of news pertaining to the organization wanting to improve returns with shareholders will allow Mr Market to take a second look at this counter again.
Thanks for reading!
Miss Niao xoxo