## WEGE special project

Cash flow

At Sharpfokus we have learnt from personal experience that for stock market investors, the key is not profit or assets, but cash flow. In this report we wil look at how the Indonesian stock market investors value cash flow, an example of where lack of cash flow has affected share performance & the potential which we see for WEGR to use cash flow to create fantastic value for your shareholders.

At Sharpfokus we have learnt from personal experience that for stock market investors, the key is not profit or assets, but cash flow. In this report we wil look at how the Indonesian stock market investors value cash flow, an example of where lack of cash flow has affected share performance & the potential which we see for WEGR to use cash flow to create fantastic value for your shareholders.

*1.5%*

Chasing yield

The Indonesian stock market has over the years attracted some of the world’s largest professional investors. With interest rates around the world at low & even negative levels for several years now, investors are looking for cash flow when they invest. We can clearly see this from the performance of some of the JCI Index’s largest & best performing listed companies.

Cash flow

When we talk about cash flow we mean the total combustion of the operating & investment cash flows including interest expenses (which are sometimes put into financial cash flow). This total is the free cash flow which can be used to either pay back loans to debt investors or pay equity investors through dividends or share buy backs. This free cash flow is the main reason investors invest in companies. Everyone likes to get paid back.

Examples

We can see several examples of this. The largest stock BBCA has made an average free cash flow of Rp10.9tn for the last 5 years. The shares are valued at Rp822tn which is a yield of 1.3%. Others are similarly highly valued. UNVR has made an average cash flow of Rp5.9tn a year. The market value is Rp314tn which is a 1.8% yield. Another popular stock ICBP has generated an average Rp1.8tn of free cash flow a yea & has a market value of Rp133tn or a 1.4% yield. ICBP shares are worth 3.2x the value of its total assets.

*JSMR*

Cash flow

Now we can look at an example of where exactly the opposite has happened. Jasa Marga (JSMR) is an example of a large listed company which has produced increasingly negative cash flow instead of positive. Before 2011, toll road operator JSMR made positive free cash flow. In the years from 2007 to 2010 the total positive cash flow was Rp130bn. Then starting from 2012, the cash flow turned negative & from 2012 to 2019 the total cash flow has been minus Rp27tn or minus Rp3.4tn a year. The last 12 months cash flow was minus Rp5.4tn.

JSMR

While the positive cash flow has had a very positive impact on the share prices of BBCA, IUNVR & ICBP, the negative cash flow has had a very negative impact on the share price of JSMR. JSMR shares were rising at an average rate of almost 80% a year or 7% a month by 2011 when cash flow was still positive. Since 2012 the performance of the shares has declined steady to reach minus 1% by December 2018. The average annual return since the share price reached its peak of Rp7,183 in early 2015 has been 0%. The share price today is Rp5,200 or 27% below that peak 5 years ago.

Assets

This performance has also been reflected in the valuation of the company’s assets. As an investor, you would expect a company to build its assets & create cash flows which are valued higher than the value of the assets. In 2012, JSMR total assets were worth Rp24.8tn & the shares had increased such that the market value of the company was Rp38tn or 1.54x the value of the assets. As of the third quarter of 2019, the total value of the assets has reached Rp94.3tb while the market value of the shares has hardly changed at Rp39.6tn or a ratio of just 0.41x.

Cash flow

As a high performance construction company, Wika Gedung (WEGE) has been able to generate strong cash flows. Including annual data from rhe IPO prospectus, we have a combined 5 years of annual & quarterly data to use starting from 2014. Up to the last quarter of 2018, the total free cash flow generated by WEGE over those 5 years had reached Rp852bn or an average of Rp170bn a year. The cash flow for 2017 & 2018 even reached Rp1.3tn or an average of Rp660bn a year.

Drop

Then into 2019, the picture changed dramatically. The total free cash flow in 2019 reached Rp1.59tn by the end of the third quarter. This was enough drag the total cash flow created over the almost three years since 2017 to reached a negative Rp266bn. The main reason for this is the negative working capital which was positive Rp282bn by the end of 2018 but then plunged to minus Rp1.3rn by the 3Q of 2019.

Recovery

The impact of the negative cash flow has been that rhe share price today at Rp312 is about 14% above the IPO price 2 years ago. But we have started to see a recovery in the working capital & negative cash flow. From minus Rp983bn in the 1Q 2019, the cash flow has improved to minus Rp92bn by the 3Q. Our Sharpfokus forecast for the 4Q is positive cash flow of Rp342bn which would be enough to return the total cash flow since 2017 back to a positive Rp84bn.

While the positive cash flow has had a very positive impact on the share prices of BBCA, IUNVR & ICBP, the negative cash flow has had a very negative impact on the share price of JSMR. JSMR shares were rising at an average rate of almost 80% a year or 7% a month by 2011 when cash flow was still positive. Since 2012 the performance of the shares has declined steady to reach minus 1% by December 2018. The average annual return since the share price reached its peak of Rp7,183 in early 2015 has been 0%. The share price today is Rp5,200 or 27% below that peak 5 years ago.

Assets

This performance has also been reflected in the valuation of the company’s assets. As an investor, you would expect a company to build its assets & create cash flows which are valued higher than the value of the assets. In 2012, JSMR total assets were worth Rp24.8tn & the shares had increased such that the market value of the company was Rp38tn or 1.54x the value of the assets. As of the third quarter of 2019, the total value of the assets has reached Rp94.3tb while the market value of the shares has hardly changed at Rp39.6tn or a ratio of just 0.41x.

*WEGE*Cash flow

As a high performance construction company, Wika Gedung (WEGE) has been able to generate strong cash flows. Including annual data from rhe IPO prospectus, we have a combined 5 years of annual & quarterly data to use starting from 2014. Up to the last quarter of 2018, the total free cash flow generated by WEGE over those 5 years had reached Rp852bn or an average of Rp170bn a year. The cash flow for 2017 & 2018 even reached Rp1.3tn or an average of Rp660bn a year.

Drop

Then into 2019, the picture changed dramatically. The total free cash flow in 2019 reached Rp1.59tn by the end of the third quarter. This was enough drag the total cash flow created over the almost three years since 2017 to reached a negative Rp266bn. The main reason for this is the negative working capital which was positive Rp282bn by the end of 2018 but then plunged to minus Rp1.3rn by the 3Q of 2019.

Recovery

The impact of the negative cash flow has been that rhe share price today at Rp312 is about 14% above the IPO price 2 years ago. But we have started to see a recovery in the working capital & negative cash flow. From minus Rp983bn in the 1Q 2019, the cash flow has improved to minus Rp92bn by the 3Q. Our Sharpfokus forecast for the 4Q is positive cash flow of Rp342bn which would be enough to return the total cash flow since 2017 back to a positive Rp84bn.

Value

The market value of WEGE at Rp3tn is about 0.5x the value of the total assets. But there is tremendous potential to boost this. If annual cash flow can be returned to the previous average Rp170bn, & consistently maintained, then if we use the average cash flow yield of the large stocks which is 1.5% this would imply a market value for WEGE of Rp11.3tn or a share price of Rp1,175 & a market value of 1.8x the current total assets. If this process took 2 years, the average monthly share performer would rise 10x from the current 1% to 11%.

The market value of WEGE at Rp3tn is about 0.5x the value of the total assets. But there is tremendous potential to boost this. If annual cash flow can be returned to the previous average Rp170bn, & consistently maintained, then if we use the average cash flow yield of the large stocks which is 1.5% this would imply a market value for WEGE of Rp11.3tn or a share price of Rp1,175 & a market value of 1.8x the current total assets. If this process took 2 years, the average monthly share performer would rise 10x from the current 1% to 11%.