Description
Summary: At Rp760 Mitra Pinasthika Mustika (MPM) is a US$230MM market cap Indonesian consumer automotive company. It operates in three segments, 1) a dealer of Honda two-wheel bikes, 2) an auto rental service, and 3) an insurance company.
MPM trades at 8.3x LTM P/E, 4.9x LTM P/E ex-cash, & 2.5x LTM EV/EBITDA. LTM sales are ~30% below pre-covid levels and a cyclical recovery in demand should gradually lift LTM EPS of Rp91 to ~ Rp130. Additionally, MPM holds a large net cash balance (~Rp320/share) from its 2018 oil lubricant sale which will be deployed over time boosting earnings. Applying a 10x multiple to mid-cycle EPS and adding the value of the company’s excess cash yields a fair value of >Rp1,600. In the interim, shareholders are paid to wait as the company is paying out >100% of net income as a dividend (~15% LTM yield).
Overview: MPM was founded in 1987 by William Soeryadjaya (the founder of Astra) as a motor bike distributor for Honda Astra Motors. Over the years the company expanded into a variety of tertiary segments and listed on the Indonesian Stock Exchange in 2013 at Rp1,500. The company is 54% owned by Saratoga Investama, a publicly traded Indonesian Private Equity firm, owned by Edwin Soeryadjaya, William’s son. Saratoga has several other publicly listed portfolio companies and a strong record of value creation, corporate governance, and returning capital to shareholders.
MPM operates in three segments, 1) Distribution and Retail, 2) Transportation and 3) Insurance.
- Distribution and Retail (77% of EBIT): MPM has the distribution rights for Honda bikes in East Java and East Nusa (~40MM people). Honda has >80% market share in these regions and demand is generally mature (growing 1-3%/yr). The contract has three year renewing terms but it would be difficult for Honda Astra Motors to either in source distribution or move it to a competitor given the infrastructure in place. Like any OEM, Honda is always pushing on margins though by tightening KPIs.This segment is largely a cash cow.
- Transportation (3% of EBIT): MPM operates an auto rental network. The segment has been EBIT breakeven for the past several years. Despite significant effort by Saratoga and MPM, it is unclear if MPM will ever be able to turn the business around. Pre-covid there was talk of bringing in a Japanese partner but those talks seem to have fizzled. The segment is sitting on Rp250/share of unproductive equity so there is upside if they ever sort it out or find a buyer
- Insurance (20% of EBIT): The company has been expanding into insurance which is sold through its dealership network. ~50% of motor bike sales are leased which requires insurance, which MPM provides. MPM is using this base to expand into tertiary products as well. This segment has modest growth.
In 2018 MPM sold its Federal Oil lubricant business to Exxon Mobil for net proceeds of US$340MM or ~14x EBIT. With the proceeds, the company paid down $135MM of debt on its balance sheet, paid $146MM in dividends to shareholders and has since been sitting on a ~$90MM net cash position (Rp320/share). Since 2019 the company has been evaluating various M&A opportunities but this was put on hold during 2020 due to COVID. The company will eventually deploy this capital which will boost returns.
Conclusion: MPM currently trades at 8x LTM P/E. Factoring in a cyclical rebound in demand and giving credit to the company's excess cash balance this multiple decreases to ~3.5x P/E ex-cash. MPM and Saratoga have a strong track record of corporate governance and capital allocation and shareholders are paid to wait as MPM is paying out the majority of earnings as a dividend.
Other
- Starting in September 2020 PE firm Affinity began selling their shares of MPM on the market. They finished earlier this year resulting in an increase in the liquidity of MPM shares. Affinity has not made any public comments on their decision to exit though they initially invested out of their 2012 fund.
- Saratoga’s retired co-founder, Sandiago Uno, has become involved in Indonesian politics and is currently a minister in the federal government.
- MPM’s official policy is to pay out 40% of net income as a dividend but the last two years have paid out ~ 100%.
- MPM owns 40% of a FinCo with MUFG which provides leases for new bike sales and is accounted for as a JV
I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.
Catalyst
- Cyclical rebound in earnings
- Company deploying excess cash balance