EVA Brief: BIRD (PT Blue Bird Tbk)

Background: This stock is in a downtrend ever since it went IPO. I thought the impulsive looking wave in 2017 was the start of something great. It was not. Now, the broken trendline and other technical signs (volume and RSI) just paint weaknesses. I wonder just how bad it is.

Performance Analysis

The beauty of analyzing company performance with EVA is it is straightforward: Positive EVA means the company overall creates value and increasing EVA means the company increases the value it creates. Blue Bird does neither. It has been a wealth waster nearly since its IPO, and it does not look any better. The timing for its IPO was suck. Just about one year from its IPO, its business is badly wounded by Grab and GoJek (plus Uber back then).

Blue Bird performance is weak. The weakness is very telling by looking at its EVA. Net income, however, could easily give a false sense of security here.

Of course, as usually is the case, EVA is the answer to why BIRD share price has fallen so much. Why make it complicated by putting 10+ financial ratios when with just 1 number, EVA, we could tell what is really important?

Except in 2017, the change in market value is driven by the change in EVA. We need to look at the embedded expectations to understand the value given in 2017.

Let's now look into the details. We now know EVA has gone bad to worse. With some calculations, what makes BIRD's EVA in a bad shape is because its EVA margin has been declining. This situation could be seen in ROIC too...

It is now important to know why this is so. Further EVA Margin breakdown reveals a very insightful picture.

The major reason why EVA Margin has been declining is because of a shift in NOPAT margin...

You see, I could imagine that severe competition with Grab & GoJek would affect margin and sales growth, the latter would be tied to fixed asset turnover. So the problem is like this: First, online competition lowers pricing. Second, BIRD has many vehicles and drivers, but now fewer passengers. That means wasted capacity. So now we have lower pricing and wasted capacity. Which is worse? The answer to that and the actions taken by the company will give me some valuable clues about what could and likely be done (or not).

The EVA margin breakdown tells me that although BIRD indeed is facing pressures from both operating margin and fixed asset efficiency, I now know that EVA margin suffers A LOT from the decline in operating margin. Much more so than wasted vehicles. Lets put it this way. EVA margin has been declining from 1.6% in 2015 to -7.9% in Q2 2019. That's a huge -9.5% contraction in EVA margin. The decline in operating margin alone contributed to -6.6% decline in EVA margin over that period. In comparison, although not small, but lower vehicle efficiency just contributed to -2.7% decline in EVA margin in that period.

The management has been doing what it could. They cut the company's assets. Sold its unused vehicles. That way, BIRD was able to limit further degradation of EVA margin from fixed asset charge when revenue kept getting slashed.

Here's my take:

Selling vehicles could not go on forever. It could only slow down EVA deterioration, not propping it back up. It really needs some miracle in its operating margin. From the way I see it, that miracle may come from driverless cars adoption. Unfortunately, that means job losses for a lot of taxi drivers. But the inescapable conclusion is that BIRD must take whatever opportunity it can to propel its operating margin. It is wishful thinking to expect the government could support the taxi industry by giving pressure to Grab & GoJek. As reality has shown, competing in price with these companies is a losing business, but what are the alternatives? From this fundamental analysis, a case of undervaluation is simply not good enough for me. For me to be interested, BIRD stock has to be ‘severely undervalued'.

Market Expectation Analysis

There are two times when growth expectation from the market became stupid: At the highest point after IPO in 2015 and the market peak in 2017. What I mean by stupid is that the implied EVA growth rate at those points simply could not be justified either by the company's historical performance nor by the global database. So yes, the danger in 2017 could be identified if we pay attention to MIM (Market Implied Momentum – or – implied EVA growth rate adjusted to sales). FGR (Future Growth Reliance), which measures the portion of market value that depends on future EVA growth also tells the same thing.

You could read FGR numbers as a rough guideline just like how you read PE ratio. Historically, BIRD has the FGR upper limit of 78% (meaning, 78% of market value depends on future EVA growth currently not in place—yes, that's a lot of expectations), and lower limit of 38%-42%. The current price at IDR 2,800/share is not at a lower range from FGR perspective. For a more relevant interpretation for investing purposes, the current FGR of 54% means that the current market value would fall by 54% should investors pull away from their expectation of future EVA growth. That interpretation should make a lot of investors start to care about this number.

However, a more useful expectation number is MIM because it could be tied to real operation performance. Globally, the majority of companies could not generate EVA momentum beyond 1% per annum in 5 years. Only a handful of exceptional companies could generate EVA momentum above 7% per annum in 5 years. What happened was investors put that exceptional EVA growth expectations to BIRD in 2017 when its share price was IDR 5,200/share while its EVA had been declining. What they were thinking was not my interest. I just need to know that it was unrealistic in so many ways. I do not even need to say how ridiculous the expectation was after IPO.

If you understand how to derive market expectation from share price in a fundamentally sound way, you would not be suckered buying into BIRD's top even without knowledge of how disruptive mobile platform could be.

At any rate, at the current price, EVA momentum is expected to grow 2.8%/year for the next 5 years before going flat. That is a tall order. To make it worse, I just have not found a clue to believe BIRD's EVA this year would be better. Q2 2019 (LTM) data shows further EVA deterioration from the 2018 level.

Conclusion

At the current price (IDR 2,800/share), the implied EVA momentum (MIM) shows that the market is still supporting BIRD with a highly optimistic EVA future growth expectations. It is a recipe for disaster when reality finally sinks in (EVA would likely tumble this year now that Q2 result looks bad). All of these add up to weak technical signs. BIRD will be on my mind, but not yet. I do have some levels in mind which are likely to offer major support or even turning point. These numbers are Fibonacci confluence zones which use 3,100 (wave iv of some sort) as the mid-point. The expected EVA growth numbers look much more acceptable from those points.

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