EVA Brief: The Underestimated WEGE (Wika Gedung)

One important trend to notice is the management commitment to expand its fixed assets since 2016: a year before IPO.

*Q3 data is LTM (last twelve month)

Aggressive investment like this requires sales growth or better margins. The latter has been pretty much constant in recent years, so the focus should be on sales growth.

Unfortunately, we have been seeing a worrying sign in sales. Contraction. Expect further contraction this year. My guess is 20% contraction, bringing sales lower than 2017 level.

Add that to a likely worsening working capital, this year’s EVA contraction would be a record.

Yes, WEGE has been able to consistently deliver return above its cost of capital. It has been a value creator.

So, what does the market think?

Nothing good. In general, the market is skeptical about WEGE’s ability to be a value creator. MVA has been negative, except in Q3 2019. The spike in Q3 2019 is likely because of delayed reaction to a very good real performance in 2018.

Q3 2019 is a prime example of sticking to EVA no matter what. Eventually, and often not long, the market will correct itself if the company is really good.

The fact is, WEGE performance is solid (see EVA chart above) until 2019, and the market was exceedingly negative in 2018.

Where are we now? The market is really negative about WEGE. It currently sees WEGE as a value destroyer. If this year WEGE could prove the market wrong by delivering another solid EVA, then I believe there is a lot of potential here.

However, as mentioned in the beginning, I suspect WEGE would experience the biggest EVA contraction in this year. Consider that with the fact that WEGE investors are generally skeptical bunch, I think WEGE share price would make a record low first.

As a side important note, I believe the age of a very high ROIC for WEGE is over. It will be in the range of 20s going forward – still a decent return. As new contracts are now largely dependent on gov & SOEs, project payments would take longer.

Let’s recap.

To be clear, the market is now exceedingly pessimistic about WEGE. Its invested capital (net debt) should be worth IDR 254/share. The fact that current share price is 155/share means the market thinks WEGE management would destroy that 254/share value. WEGE has never been a value destroyer so far, and I don’t think it would become one even if I believe the age of high ROIC for WEGE is over.

However, I do believe the market will drive WEGE share price even lower. This would be driven by the biggest EVA contraction this year. Personally, I want to know first how bad it is by looking at its Q2 performance. Q1 report is pretty much useless, especially now. It is obvious that the management target for this year (outlined in the company’s presentation March 2020) will get a big haircut.