Pan-Asia Equity Bottom-up, Wickhams Hill

Lloyd Moffatt

I am a fundamental-value investment analyst with a bent for events and soft catalysts.

During my time on both the buy-side and sell-side I focussed on small and mid-cap companies in ASEAN, Australia and HK/China.

Although a generalist, my background as an engineer lends itself toward deep-dive research in more practical sectors like consumer and industrials.

Previous recommendations include:

Concepcion Industrial		(CIC PM)	BUY	03/12/2015		+100.1%
OSIM International		(OSIM SP)	BUY	11/12/2015		+36.9%
Bellamy's Australia Ltd	(BAL AU)	SELL	08/06/2016		+60%
Pryce Corp				(PPC PM)	BUY	14/07/2016		+105%
Rukun Raharja			(RAJA IJ)	BUY	16/02/2017		+61%
Asian Pay Television Trust (APTT SP)	BUY	30/12/2016		+67%

Pan-Asia Equity Bottom-up

The Week That Was in ASEAN@Smartkarma - ASEAN Retail, Indonesian Pipes, and Textiles

CrossASEAN Research

At CrossASEAN Research we strive to produce unbiased and differentiated on the ground insights on companies across South East Asia. Our Research is produced for the most part after face to face meetings and conversations with company management to dig deep into the long term vision and strategy of the companies we cover. We seek to deliver investable and actionable themes on sectors and markets across SE Asia, often in collaboration with other Insight Providers across the region, pooling the vast experience of the analysts within the Smartkarma Ecosystem. We also offer bespoke work and tailor made trips for our clients. 

Insights across South East Asia

Equity Bottom-Up

Steel Pipe Industry of Indonesia / Equity Bottom-Up

Steel Pipe Industry of Indonesia (ISSP IJ)

Steel Pipe Industry of Indonesia (SPINDO) is the country’s largest steel pipe manufacturer, based in Surabaya. The company grew from three to six factories prior to its IPO in 2013. As the largest and most efficient domestic producer, SPINDO operates with a structural cost advantage versus other domestic steel pipe manufacturers and notably remained profitable during the 2017 downturn.
SPINDO is leading innovation in an ‘old world’ industry in Indonesia. Investment in new machinery has increased capacity while reducing labour costs. Inventory management has also improved newer machinery enabling the company to make smaller production runs and hold less finished goods.
A robust gross material margin is supported by the company directing capacity towards higher-value products rather higher volumes and focus on increasing utilisation of active production lines to reduces unit operating costs. Management targets gross margins growing from 13 to 20% by FY21, which is roughly in-line with where they were in FY16.
Improving cash flow will allow the company to shrink their working capital from 400 days during FY17 to a targeted 120 days. This outstanding balance of near IDR2tn will be refinanced at a saving of more than 200bps.
Across all of these initiatives, net margins should recover from 1.5% to 5% over the next 2 years. FY19 forecast of IDR153bn will mark a major recovery in earnings following a weak FY17-18. We expect the trend to continue to IDR259bn in FY20 and IDR335bn in FY21.
As earnings grow, the PER will fall from 9.0x in FY19 to just 4.5x in FY21. Our conservative expectation is that SPINDO will trade on at least 10.0x fwd PE, factoring in the current valuation, lack of widely known forecasts, and increasing interest from the market. At this level, the implied price target would be IDR360 and IDR460 in FY20 and FY21 respectively.

Steel Pipe Industry of Indonesia (SPINDO) is the country’s largest steel pipe manufacturer, based in Surabaya. The company grew from three to six factories prior to its IPO in 2013. As the largest and most efficient domestic producer, SPINDO operates with a structural cost advantage versus other domestic steel pipe manufacturers and notably remained profitable during the 2017 downturn.
SPINDO is leading innovation in an ‘old world’ industry in Indonesia. Investment in new machinery has increased capacity while reducing labour costs. Inventory management has also improved newer machinery enabling the company to make smaller production runs and hold less finished goods.
A robust gross material margin is supported by the company directing capacity towards higher-value products rather higher volumes and focus on increasing utilisation of active production lines to reduces unit operating costs. Management targets gross margins growing from 13 to 20% by FY21, which is roughly in-line with where they were in FY16.
Improving cash flow will allow the company to shrink their working capital from 400 days during FY17 to a targeted 120 days. This outstanding balance of near IDR2tn will be refinanced at a saving of more than 200bps.
Across all of these initiatives, net margins should recover from 1.5% to 5% over the next 2 years. FY19 forecast of IDR153bn will mark a major recovery in earnings following a weak FY17-18. We expect the trend to continue to IDR259bn in FY20 and IDR335bn in FY21.
As earnings grow, the PER will fall from 9.0x in FY19 to just 4.5x in FY21. Our conservative expectation is that SPINDO will trade on at least 10.0x fwd PE, factoring in the current valuation, lack of widely known forecasts, and increasing interest from the market. At this level, the implied price target would be IDR360 and IDR460 in FY20 and FY21 respectively.

SPINDO (ISSP IJ) - Cementing a Strong Recovery, 135% Upside