Valuation March 2017: Darma Henwa (DEWA.JK)

Download Excel file containing the full valuation: DEWA Quick Valuation.JK

After the recent boom and bust in Bakrie’s stocks in early 2017, it is interesting to see whether the fundamental valuation is in line with the stock price movement in the market. Many analyst have covered BUMI.JK with their own subjective opinion of the future prospect, however there is only few analyst covering BUMI’s subsidiary, Darma Henwa (DEWA.JK). In this valuation, I’m calculating the fair equity value of DEWA.JK using this year management guidance and future industry prospect.

Screen Shot 2017-03-09 at 9.13.48 AMFigure 1. Income Statement Projection

Since the annual report for year 2016 has not been released yet, I’m extrapolating the 3rd Quarter 2016 report to project 2016’s income statement. Management target revenue to be US$ 519 million in 2017, slightly above my prediction. Meanwhile net income is expected to be US$ 9.7 million, slightly under my projection. Growth is expected to stabilise due to the limited growth potential in the coal mining sector and limited upside of future coal price increase.

Screen Shot 2017-03-09 at 9.14.20 AM Figure 2. WACC and Terminal Growth

DEWA’s 2016 ROE is expected to hover around 1%, translating to terminal growth of the same number (no dividend was paid). Beta of coal mining companies averaged 1.6, we use this number instead of DEWA’s beta (0.43) obtained from PEFINDO which is biased due to the stock illiquidity. Complete calculation is shown on the excel file linked above.

Screen Shot 2017-03-09 at 9.14.28 AM

Figure 3. Equity Value Calculation

Using the assumption derived from income statement, WACC, and terminal growth data, I arrived at DEWA’s fair equity value of Rp 84.3/share, implying 12.7x PE 2017 and 9.3x PE 2018. This has not incorporate the fact that many of DEWA’s receivable and payable is over 2 months late and may be problematic later on for the cash flow and liquidity measure (possible downside risk).

Screen Shot 2017-03-09 at 9.14.37 AM

Figure 4. Sensitivity Analysis

Changing Rupiah/USD rate and terminal growth assumption impacts DEWA valuation (which is based on US$) heavily, therefore I included the sensitivity analysis to the stock fair value based on movement of Rupiah/USD and growth. The base case is for Rupiah/USD rate at Rp 13.500/USD and 1% terminal growth assumption (liked to DEWA’s retention rate and ROE). In my personal view, it is unlikely for the rupiah to depreciate below Rp 14.000 this year (despite the Fed rate hike). On the growth side, DEWA management may find it challenging to maintain average ROE of 1% in the future, for reference, average ROE for the last 4 years is -7%, while in the last two years DEWA ROE is between 0-1%. In my conclusion, trading range of DEWA should hover around Rp 76-85/share in the current condition.

In March 9th 2017; 11 am; DEWA.JK is trading at Rp 74/share, giving 15% upside if the upper bound is reached.

Published by Journeyman

A global macro analyst with over four years experience in the financial market, the author began his career as an equity analyst before transitioning to macro research focusing on Emerging Markets at a well-known independent research firm. He read voraciously, spending most of his free time following The Economist magazine and reading topics on finance and self-improvement. When off duty, he works part-time for Getty Images, taking pictures from all over the globe. To date, he has over 1200 pictures over 35 countries being sold through the company.

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