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Metrodata Electronics (MTDL) is an integrated IT company which was established in 1983. It is a parent company to several subsidiaries as follows: Screen Shot 2017-12-24 at 10.03.11 am.png

Distribution Business

  • since 2011, a JV which MTDL owns 50%
  • accounts for more than 75% of  MTDL’s total revenue
  • New & Ongoing Initiatives:
    • Further investments in Cloud platform as the focus of future product choice
    • owns a B2B platform which all of MTDL’s partners will be employing by the end of 2017:
      • automates the sale of hardware products
      • serves as a software sales centre under an Electronic Distribution Model
      • serves as an online platform to purchase cloud solutions
    • B2B platform would be further developed to a B2B2C platform –> future cost efficiencies
    • Building a warehouse in Cikarang which will be ready by mid-2018
      • hence MTDL does not depend on third parties for its logistics
    • expand distribution to districts

Solution Business

  • Provides IT solutions to businesses such as: Cloud Computing, Big Data & Analytics, Business Application Implementation, IT Security

Consulting Business

  • Provides end-to-end services such as: ERP, CRM, HCM, Supply Chain optimisation
  • SAP Provider

E-Commerce Business

  • metrodataonline.com – an online marketplace selling IT, Gadgets and Electronics products
  • currently this division does not have a material contribution to MTDL’s bottom line

Its major owners include PT Ciputra Corpora (35.83%) and Ir. Hiskak Secakusuma (16.39%). On a separate note, PT Ciputra increased its stake in MTDL from 25.28% to 35.83% since July 2017.

Key Statistics

Net Income Margin (5-year average): 2% – These very low margins can concern investors, since a change in one variable (e.g. selling price or expenses) can have a large impact on profits, increasing the potential variability of earnings in the event of a market disruption. However, it is important to understand that this is due to MTDL’s large sales coming from its distribution business, which sells many of its products wholesale (e.g. to Mangga Dua stores). In return for the low margins, MTDL also experiences lower inventory risk because wholesale buyers usually have more stable orders.

Return on Equity:

Screen Shot 2017-12-24 at 10.00.34 am.png

 

Under current CEO Susanto Djaja, MTDL has achieved very high profitability as evidenced from its ROE record. It is a stark contrast from before 2012, where ROE was always below 10%. The high ROE and growth can also be attributable to the formation of Synnex Metrodata which significantly changed the company’s fortunes.

Debt-to-equity ratio (Q32017): 0.18

Governance

  • During current CEO Susanto Djaja’s tenure (since May 2010), there has never been a rights issue
  • Dividend Policy: Payout 20-30% of net income as dividend

Market & Growth Dynamics

In my opinion, the ICT business is marked with high competition and low barriers to entry, although companies like MTDL can have some scale advantages against smaller competitors. As a result, MTDL’s performance will largely depend on the ability of its management, who so far have a great track record.

Meanwhile, market growth can still be high, given Indonesia’s low computer-to-people ratio, and as more businesses realise the need for IT solutions.

In addition, most of MTDL’s penetration is in Java Area, accounting for more than 50% of its distribution centers. There is potential to grow outside Java, following the growth of those economies.

Valuation

At a price of 600, Market Cap = Rp1,473billion

9M2017 earnings = Rp155billion (TTM=Rp262billion)

TTM PE Ratio: 5.62

Price-to-book Value: 1.02

Fair Value

To derive a fair value for MTDL, I will use the Gordon Growth Model. My growth rate (G) estimate is 4%, which I believe is conservative given the company’s growth initiatives, and having an 8-year net income CAGR of 13.1%.

2017F ROAE =  262B/(1,300B+1,549B/2) = 18.4% -> assumed sustainable ROE

2018 Target Price: [(0.184 – 0.04) / (0.12 – 0.04)] x 1,549B = 2,788B = ~1,130/share

Conclusion

MTDL might not have stellar business economics, but their high returns on capital suggest that management has been doing a good job. Also, they are valued very cheaply at 5.6x earnings, where as we have shown MTDL has room for growth and has been conducting initiatives which will fuel future earnings growth. My TP reflects 9.8x 2018FP/E and 1.8x 2018FP/BV.

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2 thoughts on “MTDL: Growth stock priced like a value stock

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