PTPP Worrying Signs (Q2 2020)

Before we go to economic profit analysis, I want to bring your attention to technical chart which shows 2 critical developments.

The first one is volume. Transaction volume was at a record high in March-July. Always beware of a sudden spike in volume. I suspect many people see this as a buying commitment. I believe it is the opposite. The smart money has been selling aggressively. Volume spiked in each pivot highs. Massive supply there.

The second one is the position in the Composite Index indicator. I have repeatedly shown you that this signal with its moving averages crossover often predates sharp price movement. In this case, the signal points to the downside. Ignore this signal at your own peril.

Both of these technical signs tell me that PTPP is on its way to make a new low. What is going on here? Is it a case of ungrounded pessimism, in which case offers us a very lucrative opportunity? Or, is something really wrong is happening? Time to look at EVA.

I am tempted to show you with PTPP how misleading net income could be. You can't trust accountants to do investors' job (and they're not supposed to). But that would make this too long. I'll save it for another time.

The fact is, Q2 2020 is so bad that you can see it just by looking at its net income. But it is still relatively mild compared to what EVA tells you.

PTPP has not been able to earn enough to cover its cost of capital since 2019. But it has never been this bad.

Its current economic performance is so bad. If investors do not expect things would be better eventually, there would be no share price to speak of.

Look at the chart below. PTPP share price is decomposed into its 3 main components: the value of its net assets (capital), the added-value from its current operation (COV), and expected economic profit growth. You can see that PTPP current share price is now entirely supported by investors' expectation of a better future.

What is going on? How could PTPP end up in this position?

Unlike its peers which are heavy from turnkey projects long payment, investors' money is tied up in various assets in PTPP. Since 2015, PTPP has been investing massively. A lot of joint operations, entering the oil & gas business, expanding real estate. Starting in 2019, the rise in the investment trend includes its working capital as well.

Regardless of the type of investments made, things did not go nicely. This surge in investment trend has not been compensated with satisfactory revenue growth. In fact, revenue has been declining (excluding JO revenue)...and we saw a rapid decline so far in 2020. YoY, revenue was down almost 40% from last year.

If this contraction persists...

...EVA would make a heroic fall in this full year. This is a hard lesson for the consequence of rapid and unfocused investments.

Afterthoughts:

The signs are nothing good. The rapid decline of economic profitability means constructions are likely stalled. The rapid increase in volume transactions in PTPP worries me. If my prognosis is correct, that means investors are bailing out from construction. I hope I'm wrong. Indonesia's construction is heavily dependent on the willingness of private investors to fund it. It will be even more so.

It is unthinkable to imagine PTPP fails (bankrupt). PTPP is a big player. One way or another, construction has to go on. Indonesia urgently needs it. PTPP historic low is somewhere around 300/share. If PTPP gets there (which is what I'm expecting), it is likely the situation got worse. But certainly, I wouldn't call someone who dares to make a big investment there a fool.