First Sell Trade – Divested Indofood Agri

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:

  1. Low Book Value
  2. Acquisition of Treasury Shares
  3. 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!

Miss Niao.

Author: Miss Niao

Hello! I blog about financial matters and things that average people can do to have a better retirement. I want to inspire people to take control of their money and have a better understanding about it. If you are interested to know more, follow me @! :)

22 thoughts on “First Sell Trade – Divested Indofood Agri”

  1. Hi Miss Niao, I must say this is a very conservative (or pessimistic, xD) method of calculating the net asset.

    The holding duration is merely half year. In my opinion, once you have carried out all the assessment/due diligence before buying any stock, you should hold it for at least 2 or 3 years. In reality, there are business circle/economics circle, etc. Business takes time. It takes time for management of a company to turnaround the company. Everything takes time. If you hold it for a slightly longer duration, the risk of uncertainty will reduce, and you might have a clearer picture of which step to be taken next.


    Liked by 1 person

    1. Hello ck,
      Thanks for your kind advice. I would prefer to be more conservative to widen the margin of safety. But I decided to sell in the end because I see no point averaging down only at a price where is far off my entry price, and of course, a lot of other factors like the earnings/dividend yield of the stock over the long run.


  2. I agree. It is never easy cutting losses 😥 At least you learn something out of this, not to take NAV at face value. Always discount here and there.

    Sell and move on! Lots of other opportunities out there. Hahaha. You see warriortan, almost everyday buy a bit here and there.

    Liked by 1 person

    1. Yes, warriortan is active indeed. Lol.
      It wasn’t just the NAV that I took into consideration when I bought/sold the stock. There were a lot more other factors, and perhaps I should do another post about how I came to my decision.


  3. Hi there, money loss but lesson gained that’s important as well in the early stages. I never know that I will go into the commodity sector let alone palm oil. I got stuck with a palm oil stock as well and the entry price is rather similar. I would like to say that palm oil, being a commodity is a cyclical stock. I am afraid that our entry into the stocks is at the high point of the cycle and now the cycle is coming down. I have mapped out the cycle based on palm oil prices and they kinda occur in cycle of 4 years. The earliest we will see a rebound will be maybe in 2020. Till then, there will be further weakness with the protectionism going on. First up is India, the tariffs for palm oil has risen rather high as Modi is gearing up for election in his country (in 2019) by helping to protect his local farmers’ interest in a bid to win their votes. However, a glimpse of hope exist as they have now also consider increasing the tariffs of other soft oils as well. In the EU, similar protectionism is going on as well as EU has pledged to reduce the use of palm oil in bio fuels under the gist of cutting deforestation and saving the environment… however methinks that they are creating an uneven playing field for their own crops in the form of rapeseed oil etc. All in all, still a lot of baggage and probably a lot more pain before the sun even rises again. Maybe some food for your thoughts in the event if you decided to re-enter the playing fields the next time 🙂

    Liked by 1 person

    1. Without a doubt, I believe that your points are valid. However, I believe that there are also other stocks that are cyclical by nature but yet able to deliver decent returns. It is unfortunate that Indofood Agri, as I’ve found out, is not one of them – for now.
      I did not study much about the macroeconomics of oil palm, and it wasn’t because of the prospects of the industry that took hold of my attention. Unless some breakthrough has happened and there is a better source of fuel that can replace oil palm significantly, then there will be no point to invest in oil palm anymore. Rather, I was considering the fact that Indofood Agri could be cheap.


  4. Thanks for sharing. Financial ratios is one thing, prospects of the industry is also another thing. This is a commodity counter and palm oil counters have neutral outlook at best.

    Liked by 1 person

    1. Indeed. We can’t predict what will happen in the future but I believe having a competitive advantage would also help the company do better even with uncertainty.


  5. Hi Miss Nico,

    Enjoyed your Blog so far and learnt a lot from the experiences and lessons you have shared.

    In summaty
    For buying book value / cigarette butt companies, make sure you understand the assets you are holding and if they can be easily liquidated for cash.

    Focus on the numbers then the story. It is too easy to be swept away by optimistic forecasts

    Ideally, focus on low capex, low operating expenses, low debt and
    Good cash flow companies.

    It is very difficult to sell a stock. It is important to manage your position sizing.

    Any more to add?

    Liked by 1 person

    1. Liquidation is important, but only a small chapter in the story, as it is only calculated from the balance sheet alone. Once you’ve identified that there is high liquidation value though, you can score yourself some margin of safety with the right price.
      Returns on (tangible) asset/equity is also essential. It tells you how fast you can get back your principal on your investment.


  6. Hi Ms Niao,

    There is bound to be gain or losses in the investment. Treat it as a learning experience.

    I have a different approach. I also have shares of such natures. However, I still keep the shares as constant learning lesson for me. The worst case scenario is 100% loss which I have already assumed in my portfolio. The gain in other share counters reduces my worst case scenario losses.

    To each of our own.


    Liked by 1 person

    1. Hello WTK,
      It makes no sense for me to choose permanent loss over a definite yet necessary one. Yet again, the risk of loss will be reduced over the long term. Thanks for sharing your own experience.


  7. for commodities or inventory heavy types, i find doing peer comparison useful. wilmar, golden agri, first resources. i compare the net profit margin, look for positive cash flow, quarter to quarter receivables must decrease, inventory cannot keep increasing cos it means they are not selling fast enough. vested in wilmar but not the rest mainly because of the management’s track record and it’s at the beginning of the new cycle. the 4 years cycle is not just a pattern, it’s common among machinery-dependent manufacturing companies because they need to get loans and banks need them to show growth, so usually they tahan the lull period, show 2 years of uptrend, the bank lend them money, then they go and buy, but every other bugger will be getting their loans too, so once all the machinery enter “production”, 3rd year increase even more, 4th year increase but it’s inventory stock up and cant sell, then 5th year, there is over supply situation, then cycle repeats. in terms of asset depreciation, they can depreciation expense can be recognised over 5 or 7 years, for smaller companies, they recognise machinery depreciation over 3 years, so the 3rd year (oversupply year) is usually the painful one, then after that, the depreciation expense should ease off, but you need to read the financial statements to see if it’s the depreciation that is creeping into the expense or labour/material cost.

    Liked by 1 person

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