Valuation March 2017: Modern International (MDRN.JK)

Download excel file containing the full valuation: MDRN.JK 2017

As an Indonesian, especially Jakarta residence, you must have known 7-Eleven retail stores. The store that is located in almost every corner of Jakarta, sometimes located nearby Alfamart and Indomaret. Several years back, there was a booming where workers like to hang-out at such convenient stores while waiting for the traffic to dissolve. But lately we could see that competition is getting fierce and people rarely goes to 7-Eleven anymore after work. Perhaps it is due to the odd-even rules for car that is replacing three-in-one program during peak hours.

Lately, the stock price of Modern International, the parent company of 7-Eleven retail store in Indonesia, has been tumbling to Rp 50/share before bouncing back to Rp 55 in mid-March. I was intrigued to analyse the company further to know the fair valuation of MDRN.JK and its financial position. In the past, MDRN stock price peaked at February 2013 with Rp 1040/share.

Screen Shot 2017-03-19 at 9.05.50 PM.pngFigure 1. MDRN.JK Stock Price 2013-2017

MDRN sales does indeed peaked in 2014 with revenue of Rp 1.4 trillion, however its income peaked in 2013 with net income of Rp 50 billion, then decreased to Rp 40 billion in 2014 and turning negative -Rp63 billion in 2015 due to increasing COGS, selling expenses, and finance expenses. I expect MDRN financial performance to worsen in 2016 and 2017 before stabilising in 2018 and turning around to positive bottom line in 2019.

Screen Shot 2017-03-19 at 8.50.30 PMFigure 2. MDRN.JK Sales Projection

MDRN is no longer the distributor of Fujifilm photography products, for which it was compensated as extraordinary income in 2015. The company was relying on two segments for its revenue, namely 7-Eleven products and industrial products. Management is on the conservative side and trying to restructure the company to a more healthy financial position, therefore straining sales growth with the hope that its cutting cost strategy to work out. I believe MDRN is the victim of it’s own aggressiveness in the past, where it tries to take higher market share while sacrificing stability in it’s financial position, not calculating the effect of economic downturn.

Screen Shot 2017-03-19 at 8.50.55 PMFigure 3. MDRN.JK Income Statement Projection

As of 2015, I believe MDRN has breached its covenant with creditors, in which it fail to maintain debt service coverage ratio of 1.25. Perhaps it is also the reason there was a significant amount of fixed asset sales in 2015, to service the debt. However, should the management able to work out its problem with creditors, the company is still promising in term of future prospect (5 years down the road).

Screen Shot 2017-03-19 at 9.54.37 PMFigure 4. MDRN.JK Free Cash Flow to Equity Valuation

Using FCFE method for valuation and the projected income statement, the fair value of MDRN.JK is Rp 98/share, assuming there is no right issue (which is hard to do if the stock price hover around Rp 50/share). Rp 98/share implies 62x of PE19 and 13x PE20; 0.59x PS17 and 0.57x PS18. As a comparison, the average price-to-sales ratio for the industry is 0.74x (Reuters), hence PS ratio of 0.59x does not looks very expensive.

As of Friday, March 17th 2017, MDRN.JK closed at Rp 55/share, giving 78% return potential to investors. Theoretically, the range in which MDRN.JK should trade is Rp 23-125/share, however due to the restriction of lower trading range of Rp 50/share, the downside risk is limited to 10% while the upside is 78%. With the reward-risk ratio of 7.8x, I believe MDRN is attractive at current market price.

Screen Shot 2017-03-19 at 8.51.52 PMFigure 5. MDRN.JK Financial Ratios

The future of MDRN and its stock price relies on the ability of management to deal with its creditors and restructure the company back to a healthy level of margin. It surely takes time, however it will be worth it.

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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