Download excel file containing the full valuation: MDRN.JK 2017 After 7Eleven Divestiture
Download the Press Release of Divestiture: MDRN Press Release IDX
On April 21st, 2017 PT Modern Internasional announced that it sold and transfer its main business line, PT Modern Sevel Indonesia, to PT Charoen Pokphand Restu Indonesia for Rp 1 trillion. I have covered and did valuation on MDRN last month, just before the divestiture (Valuation March 2017: Modern International (MDRN.JK)). Now that MDRN future prospect changes drastically, I’m updating the valuation and evaluating whether the purchase price of Rp 1 Trillion is justified. Keep in mind that there is little information regarding the detail of the purchase, whether the acquirer assumed liabilities of acquired company, and management has not give any guidance as to what the money will be used for. Think of my valuation this time as a rough estimate instead of recommendation. Up to this writing date, MDRN has not posted annual report for 2016, which makes it even more difficult to model.
Figure 1. Sales projection of MDRN.JK After Divestiture
From 2011 to 2015, 7-eleven business line has contribute a significant and increasing amount to the total sales of MDRN.JK. In 2011 it contributed 42% total sales and increasing steadily to 72% in 2015. I expect MDRN sales to decline -88% YoY in 2017 and decline -8% each year due to the declining trend of other business line (industrial product). 2017F sales is projected to be Rp 105 billion, a steep decline from two years ago (2015) at Rp 1.23 trillion. Assumptions regarding expenses and taxes could be found on the excel file.
Figure 2. Income Statement Projection for MDRN.JK After Divestiture
Since 2015 MDRN has been struggling to pay its finance expense due to the deteriorating operating margin and fail expansion. Being bought for Rp 1 Trillion, I expect management will pay its debt to a more sustainable level. If management does not enter a new business line or do other expansion, MDRN will have lots of excess cash on its balance sheet and become a money generating machine. In Q3-2016 report, MDRN interest bearing debt totalled Rp 746.13 billion and cash totalled Rp 69.86 billion.. In my model, I projected end of year 2016 debt to be Rp 672.75 billion and cash of Rp 294.15 billion. With purchase price of Rp 1 Trillion cash, there should be excess cash left around Rp 323.73 billion – 621.4 billion, if the sales does not include liabilities. In an optimistic scenario, the acquirer (CPIN) assume all the liabilities of PT Modern Sevel Indonesia, leaving the cash purchase of Rp 1 Trillion to MDRN cash balance (does not need to repay its debt, because the debts are assumed by acquirer).
If management does not enter new business segment or other expansion strategy, the interest income generated from the divestiture fund will be several times its operating profit. I use flat 1.66% interest income rate (conservative), historically, the interest income rate range from 1.19% to 2.72%.
Figure 3. MDRN.JK Valuation FCFE After Divestiture
Since business risk of MDRN has declined significantly and it is hoarding lots of cash, I use adjusted beta to reflect the lower risk of the company. Using Free Cash Flow to Equity (FCFE) method, I derived at fair equity value from operation and interest income of Rp 13.79/share. Meanwhile, there is three scenario of cash balance depending on the details of divestiture transaction (acquirer assuming liabilities or not), how much debt is currently outstanding, and the excess cash after repaying liabilities (net cash). Please note that lack of 2016 annual report and Q1-2017 report results in great uncertainties regarding the range of possible debt and cash balance of the company. In the worst, base, and best case scenario, net cash balance (after subtracting debt) are Rp 52.72/share, Rp 117.79/share, and Rp 207.9/share. Hence, the fair equity value under those three scenario :
- Worst Case Equity Fair Value: 13.79 + 52.72 = Rp 66.51/share
- Base Case Equity Fair Value: 13.79 + 117.79 = Rp 131.58/share
- Best Case Equity Fair Value: 13.79 + 207.9 = Rp 221.69/share
- Average Equity Fair Value: Rp 140/share
Figure 4. MDRN.JK Relative Value Valuation
In conclusion, even after the divestiture of its main business line, I found MDRN to be attractive at current price of Rp 65/share. Although the fair value of its leftover business line and interest income is low at Rp 13.79/share, its cash balance is more interesting. In the worst case scenario, MDRN fair value is Rp 66/share, which is very close to current market price. Meanwhile the potential upside are 102% in base scenario and 241% in best scenario. The risk inherent in the valuation is the details of divestiture transaction, lack of transparency in the disclosure, and corporate governance of MDRN.