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HERO, sales to recover
Target price Rp1,026
Last 12-month cashflow -Rp 550 billion

January 29th,, 2021
1 minute read

Sales
Sales dropped again by another -19% in the third quarter to Rp .9 trillion, the fifth negative growth quarter in a row. Average quarterly growth is now at -9%. We expect growth to turn back to positive with a quarterly average +11% in this next 12 months & sales to rise to Rp 2.8 trillion by the third quarter, 2021.

Cashflow
Operating cashflow was still negative but positive investment cashflow made total cashflow positive again +Rp 63 billion in the third quarter. Average quarterly cashflow is still negative at -Rp 138 billion. We assume low investment spending Rp 30 billion a quarter which with higher sales gives a positive average quarterly free cashflow of +Rp 34 billion in this next 12 months.

Sales to recover, positive cashflow, slightly higher target price ...

Data file & model
Balance sheet
With the return to some positive cashflow, the balance sheet leverage of net cash minus total liabilities improved to -Rp 2.76 trillion in the third quarter up from Rp 3 trillion in the second quarter. With our forecast for positive cashflow ahead & assuming there’s no dividend payout, net cash will improve to -Rp 2.6 trillion in 12 months time.

Profit
The net loss improved in the third quarter to -Rp 137 billion from -Rp 159 billion in the second on lower non-cash costs. The cash costs ratio, net profit add depreciation minus sales as a percent of sales was flat at 102%. We use 97% costs as sales recover to predict a lower next 12 months loss -Rp 146 billion.

Value
HERO has raised a net Rp 150 billion of capital in the last five years. At the current market value of Rp 4 trillion, its at 0.4X sales, 0.7X assets, 1.32X equity with mo profitability or yield yet. Our free cashflow forecast is Rp 137 billion. At 1.6% with a 0.5X adjustment, this gives a higher target price of Rp1,026.
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