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Jul 13, 2016 17:49:09
MPMX Visible Low-Hanging Fruit Strategies
Mitra Pinasthika Mustika
Visible Low-Hanging Fruit Strategies
BUY with SOP based TP of IDR700 — 55% upside potential
After re-looking at the company and gathered our thoughts on the new management’s strategy in strengthening its business synergies, lighter capex allocation and enhancing cost efficiencies, MPMX looks more appealing as 1.) 4Q15-1Q16 earnings bottomed as earnings should gradually grow in subsequent quarters, 2.) Valuation cheap at all methods (trading at 6.7x 2016 P/E and 0.4x 2016 P/BV). We derive our BUY call with SOP based TP at IDR700 (implying 8.8x 2017 P/E). We use DCF-based approach for MPMX’s non-financing segments (auto distribution, oil lubricant, car rental) and use 0.22x 2017 P/BV target for MPM finance (68% discount to peers’ 1-year trailing P/BV).
Heavily mispriced as two of its 5 businesses worth > market cap
We expect MPMX’s cash cow business segments; 2W distribution (~80% market share in East Java) and oil lubricant (Federal Oil —20% national market share), to generate a combined 2016 net profit of IDR595bn, implying valuation range of IDR3.0trn—5.4trn assuming a conservative 5x-9x P/E target, translating to 54%-178% premium vs MPMX’s current market cap of IDR2.0tn. On the rental & financing segments, we provide several strategies the company may do to make the stock more attractive.
Scenario #1: Divesting MPM Finance & become minority shareholder
Should MPM Finance divest 11% of its stake to 49% (from 60% currently) would lead to a non-controlling stake in the financing segment, hence would significantly de-leverage MPMX’s balance sheet to a net debt to equity of 0.57x from 1.1x in 1Q16 based on our estimate, making the stock more attractive for potential screening by investors. Furthermore, the management also indicates that YTD loans disbursed were of high quality loans (system in screening quality customers already in place). However, to keep it conservative our scenario analysis suggests that a worst case non-performing financing (NPF) scenario of ~5% (current NPF is >3%) to total 2016 consumer receivables (IDR4.4trn) would only give a mere IDR219bn impairment drag.
Scenario #2: Liquidating/selling its car rental assets
70% of its car rental fleet portfolio are MPVs (eg; Avanza, Innova), which are relatively easy to determine the replacement value given high liquidity/demand in the MPV market in our view. Our scenario analysis suggests MPMX would obtain ~IDR1trn proceeds if it sells all of its 14,000 rental cars (0.1% contribution to national registered cars amounting to 12m units) at a conservative 50% discount to secondary market value, sufficient to cover 53% of its ~IDR1.9trn bonds issuance used for MPM Rent. Note MPM Rent depreciation contributes 84% of MPMX’s total depreciation.
(Source : Trimegah)