EVA Brief: PWON (Pakuwon Jati)

PWON has been defying real estate gravity for years. Not even the venerable Ciputra Development (CTRA) could reach its 2016 high in 2019. PWON managed to do that, and then some.

Now, it is in deep trouble.

You could see it in net income. But that number is still underestimating the reality. Look at how EVA nose-dived to almost zero.

I used LTM (last twelve months) calculation for Q2, so it still masks the situation. Year on year, net income for Q2 is down by almost 70%. So, it is a good bet that PWON would not be economically profitable this year.

It is important to realize the magnitude and the source of its problem.

PWON main source of income comes from tenants' rental fees and selling apartments and condos. Both are hit hard. Before this, PWON sales could only go up. We are seeing an abrupt end to that trend.

Again, that chart above is calculated in LTM mode, so it looks smoother like an average. YoY, rental income is down 35%. Apartment sales are down 72%!

I am pretty confident that the number of tenants who could not pay their rents would only rise throughout this year. The possibility of recovery in Q3 and Q4 is non-existent. It is not hard to see that sales would contract by half this year. That would make PWON, for the first time in a long time, to become EVA negative. A dramatic reversal.

This could be worse if its gross margin declines further. There is a sign for a rapid decline in gross margin. That is to be expected when most tenants have a hard time.

Apartment owners would be very lucky if they could find buyers when the majority of people are either having their paychecks cut severely or lost their jobs. I don't have good data for this, but since a lot of apartments are bought for speculation...that won't end well.

In short, not only could sales contraction to be worse but so is gross margin. Next year is anybody's guess, but I believe a sharp recovery is not possible. PWON would be operating at a new normal: economically unprofitable for who knows how long.

Now is the time for the critical question: Have investors already seeing PWON as economically unprofitable?

No, they have not. Even at its recent lowest point (300/share), investors are still valuing PWON as a wealth creator, economically profitable company.

Of course, it is possible that investors won't change their perceptions even when it becomes obvious that PWON is not economically profitable (or if by some miracle, PWON would still be able to keep its economic profit). But that would not be a good bet.

Historically speaking, PWON investors are pretty quick to adjust their expectations (it would be too long to explain this in detail, but for the most part, when EVA falls short of what is being expected, re-pricing soon follows to a more reasonable level).

I think it is more possible to expect re-pricing when investors turned pale and valuing PWON as a wealth destroyer (having negative NPV, as a consequence of negative EVA). That would make EV/Capital (or PBV) less than one.

Technical chart supports this view. Right now, an important signal, which I have been repeatedly saying, is happening. See the circled area in RSI. The signal is still premature (it could still change quickly). Just beware that this signal, when it indeed occurs, often predates sharp movement. In this case, to the downside.

From a geometric analysis, there are two important levels below recent low: 245 and 200. Note also that PWON has broken its long-term uptrend line. PWON secular bull market which started in 2006 is over.

It turns out, the level of 200/share would make EV/Capital PWON less than one (0,8). Now, I need to write this in a memo.

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EVA Gallery

I have been finding ways to better keep track of EVA analysis I have done so far. Looking at charts is certainly a much more efficient way to get the general idea. That's where Instagram gives me a solution. I will not write short analysis there. It will be just charts of true economic performance of companies. More EVA charts will be added whenever I have extra time. Click the link below or from the top right corner panel to enter EVA gallery.

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