It takes conviction to buy a stock, but it takes courage, and some guts to acknowledge your mistake and do what is necessary, even if your heart has to break a little.
I have made the decision to cut my losses, and divested 27,000 shares of Indofood Agri at 25.5 cents each.
This has translated to a 30.9% loss of my initial investment of 37 cents, and in turn became a 6.44% realized loss off our entire portfolio.
I remember blogging about why I bought the stock in the first place, and here are the 3 points to justify my decision then:
- Low Book Value
- Acquisition of Treasury Shares
- Cash Hoarding
Now, with an opposite and hopefully objective standpoint, I can justify why these three are no longer attractive enough for me to buy the stock, nor to average down with a better price.
Low Book Value? Maybe Not…
When I bought Indofood Agri, it was hovering over a book value of 0.3 to 0.4. With my selling price of 25.5 cents, the PB ratio also dropped to only 0.17! Undervalued much? That’s what I thought…
Unfortunately, this number doesn’t reflect the actual liquidation value of the firm.
Taking numbers off their balance sheet, I did a new set of calculations on the net book value with more conservative numbers. Here’s an extract of their balance sheet from their 2017 annual report:
And then consolidating them into a table…
As you can see, the final book value of Indofood Agri is actually in the red! This means that even if the firm is liquidated, then whatever assets that they have on hand would not be enough to pay 100% of their liabilities.
Why such a big difference in the actual numbers v.s. the real recovery rate? It all boils down to the huge PP&E that Indofood Agri needs to run its business. A huge portion of Indofood Agri’s assets are in their machinery and equipment needed for harvesting and and cultivation.
With a recovery rate of 25%, I assume that we can only recover one-quarter of whatever PP&E they already own, and thus the numbers are beaten down badly. (I mean, who would wanna buy used machinery, amiright?) I also did not include other intangible assets such as goodwill, since it consists the excess of the fair value of their subsidiaries, which of course, can’t be materialized.
I should have heeded my readers’ advice! They were right!
If you take a closer look their their liabilities, you will also find that their receivables barely cover the cost of their payables, let alone having enough to return any current debt.
Which brings me to my next point…
Not Enough Cash for Sustainability
Despite the management advocating sustainability for their targets and employees, they do not have enough free cash flow to sustain the business. Previously, my comment on their cash hoarding was blindsided, and due to lack of knowledge. I have only compared their cash per share to price per share, and to be brutally honest to myself, there was no significant meaning to it.
They will have to give up all that cash should they liquidate, as mentioned earlier.
The capital expenditure reported was Rp. 1,277,919 mil. With cash flow from operations at Rp. 3,581,110 mil., CF/CapEx ratio stands at 2.42. This also means that about 41% of their earnings from operations are needed to upkeep the business just on PP&E alone.
It is not surprising that they will have to, and already did, take up new borrowings if they want to expand their business further. There is just not enough free cash flow that is generated from their income sources.
Higher debt, susceptible earnings growth based on commodity prices? Oh, what should I do?
The Silver Lining (If It Exists)…
Yes, through my incompetence, I had to make this post to put it officially in ink. To remind myself to not make the same mistake again. My new target price for this stock is at 15 ~ 20.5 cents with the latest earning release, and I will have to bring down my loss to 55% to reach to the highest target price. Therefore, I have made the decision, and made it quick. I would rather sell now and enter again only when the appropriate margin of safety is met.
And on the bright side, I will now have another $6.9k in my war chest.
Even at Indofood Agri’s current price of 25.5 cents, it is still considered overvalued.
By then, I’m hoping that it will be a used cigarette butt. Enough for me to have one free puff. But till then, I’ll be stock hunting again.
Thanks for reading!