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METRODATA ELECTRONICS Tbk: Valuation
MTDL.IJ (Indonesian Equity)
Target Price : Rp 930
Closing Price : Rp 595
Upside (Downside) Potential : 57.0%
PT Metrodata Electronics Tbk is an Indonesia-based information technology company. It is engaged in the provision of IT products and services and other high-tech products and services. The company operates in three segments: distribution, which includes the sale of hardware and basic peripherals, such as data storage devices, terminals, memory and peripheral; solutions, which include the provision of maintenance service, hardware and software rental, sale of system management software, middleware, serverware and system level software, and consultation, which provides professional service for consultation, implementation and training. Its subsidiaries are PT Mitra Integrasi Informatika, Soltius Asia Pte Ltd, PT Soltius Indonesia, and PT My Icon Technology.
Market Cap : Rp1.436 B
Shares Outstanding : 4255 M
52 Weeks Range : Rp 570-680
YTD Performance : -6.2%
Flat revenue growth and margin improvement. Metrodata’s revenue increase 2.8% yoy in 3Q17, most of it contributed by 14.6% growth in services and rental revenue while hardware and software revenue grew by 1% and 6.2% respectively. Gross margin is improving as larger share of the revenue is contributed by services and rental revenue that has greater profit margin (+/- 25%) compared to hardware (+/-5%) and software (+/-10%) revenue. Operating expenses as % of revenue increase by 0.1% to 3.9% or growing 3.9% yoy on a nominal amount. Net interest expense is lower due to lower debt taken by the firm during the period, but we expect that it will increase in the next period gradually. Meanwhile, income from associates dropped significantly due to the lower profit of PT Xerindo Teknologi (XT), its subsidiary related to telecommunication equipments.
In 3Q17, Metrodata’s net profit margin increased to 3.4% from 2.5% in 3Q16, growing 37.2% on yoy basis. We expect operating profit margin to improve to 4.7% in the next year compared to 4.3% in 2016 due to lower loss from foreign exchange and improvement in gross profit margin, which is supported by higher growth of services and rental revenue that has higher profit margin (25%) compared to hardware revenue (5%).
Acquisition. During the year, Metrodata also did several acquisition. On February 2017, Metrodata acquired PT Dwitunggal Solusindo Prima (DSP) for Rp 3.5 billion (37.5%) through its subsidiaries PT Metro Mobile Indonesia (MMI). DSP is a company that develops and implements mobility application. On September 2017, Metrodata acquired 14.12% of PT Packet System Indonesia (PSI) for Rp 23.5 billion. PSI business relates to ICT system integrator. We do not see this acquisition to have significant impact to Metrodata’s bottom line in the near future.
Industry and Future Outlook. We believe ICT hardware and software demand in Indonesia will continue to grow at around 8-12% in the next 5 years. Between 2011-2015, Indonesia IT expenditure grew at 12.4% CAGR and is ranked as the 19th largest spender on IT globally (Source: International Data Corporation). Hardware dominates the majority of IT spending (89.2%), while software and services contribute 9.1% and 1.7% respectively. Hardware sales is expected to grow at 5.2% CAGR until 2020 while software and services sales is expected to grow by 12% CAGR within the same period. Cloud service and data centre are two growth engine that we expect to drive enterprise IT spending in Indonesia. This trend will be advantageous to Metrodata as one of the largest IT distributor and service provider in Indonesia. We conservatively project Metrodata revenue from hardware sales to grow by 1%, services and rental to grow by 10% and software sales to grow by 5%, which is slightly below the projected industry growth.
Valuation. We value Metrodata Electronic using FCFF method with WACC of 16.6% and a conservative terminal growth rate of 1.26%. We recommend BUY for Metrodata Electronics with TP Rp 930, implying 57% upside from Tuesday’s closing price. Our target price implies PER FY18 9.16x and PER FY19 9.01x or EV/EBITDA FY18 4.0x and EV/EBITDA FY19 3.96x. This is much lower than competitors median EV/EBITDA FY18 and FY 19 of 16.2x and 12.8x, and is also much lower than competitors’ median PER FY18 27.4x and PER FY19 19.6x. We believe MTDL is greatly undervalued and we continue to be very bullish Metrodata Electronics and waiting for future catalyst to move the stock price.
Using EV/EBITDA multiplier approach, we value Metrodata at Rp 915/share with justified EV/EBITDA multiple is 4.3x. Currently Metrodata is trading at EV/EBITDA multiple of 2.33x, implying -11.69% terminal growth rate which we believe is an unlikely scenario. Note that median EV/EBITDA comps for Metrodata is at 16.2x (see appendix).
Risk Factor. On trading perspective, thin daily liquidity is the main factor we believe causing a drag on MTDL stock price in the market, as speculator exit their position and there is lack of demand from buyers. Second, the company market capitalization is only around Rp 1.4 trillion, which could be considered as small cap and might not be allowed or too small for mutual funds to invest in, as big money inflow will not be absorbed easily by the market and might create price jumps. On business side, slower economic growth will dampen the growth for ICT products, as enterprises delay upgrading their hardware and system. Increase in competition will also drives down Metrodata’s margin below our expected margin, although we believe Metrodata has a strong supplier and customer base in Indonesia to deter margin contraction. We are also cautious on Rupiah fluctuation, as USD fluctuation to Rupiah will also affect Metrodata bottom line.