The Files: Matahari Department Store Tbk (LPPF.JK)

One of strong signs that a stock is cheap/undervalued is the fact that the stock has been in downtrend from some time. But that may not be cheap enough. From its peak near IDR 20.000/share in 2016 (adjusted for dividend), it fell from grace by near 80% in 2018 to IDR 4.270/share. I was tempted to say it is now very cheap, but the term cheap/undervalued only has meaning in relation with its fundamental. I need to consult with EVA for this. Haste makes waste.

What I have found is startling. For one thing, despite what everyone seems to think how bad Matahari Store is doing, it is still a wealth creator. It has been persistently scoring positive EVA year by year. Its EVA has been declining, true, going from IDR 1,9 T in 2016 to IDR 1,7 T in Q3 2018, but its business is still NPV positive. The impact of online business, from this perspective, is limited. It seems that online business stalls EVA growth for Matahari, but not seriously eroding it as many people would like to think.

So how is this fall from grace possible if its EVA is still quite solid? Probing into the numbers further, we could see clearly that the culprit is unrealistic expectation from investors. Here is how EVA tells me. In 2016, if we assume that Matahari could only maintain its EVA going forward, its business would only add NPV (MVA) by IDR 14,6 T. Add that to its net asset of IDR 671 Billion, its whole business would worth IDR 15,3 T. Now here is the thing. From that figure, we could easily compute its share per price after substracting the claims of debt (from employee). If that is the case, LPPF share price would be worth IDR 5.270/share. Whoops.

So, how did investors value Matahari back then? Rather than assuming Matahari could only maintain its EVA, they expect Matahari would grow it to the moon in 2016. They expect rather than IDR 14,6T, Matahari would add another IDR 40 T to its NPV. That means investors were expecting that Matahari would grow its EVA by 14,5% a year, scaled by sales, for the next five years before going flat. That number is called EVA momentum, and it can be compared with any business. That number tells me that the expectation is just too much for any company.

It turns out Matahari could not do that, of course. It could not meet shareholders expectation. That expectation then becomes enemy. Shareholders eventually realize their wrongdoing, and quickly adjust their expectation in 2017. In 2017, they eventually lower their expectation to EVA momentum of 4,6%. That is still high by any standard. Matahari responds by keeping their EVA steady as before. Finally in 2018, shareholders throw their towels and give value to what Matahari could realistically achieve: essentially flat EVA. Currently, its share price is IDR 5.800/share. I would say that it is neither expensive nor cheap. Moreover, there is a good reason to expect EVA deterioration taking place. Q1-Q3 in 2018 have shown me that it is the case with Matahari. If before 2018 online business only stalls EVA growth, the data in 2018 tells me that we have now a strong case that Matahari competitiveness is degrading.

This case tells us something very important. In stock investing, it is not enough to have a good performance measure of a company. We also need to have a reliable measure of the expectation of other investors which are baked in the share price.