Gallant Venture

Stock Code : 5IG

 

Introduction

Gallant Venture announced in December 2012 that it is buying a majority stake in a Indonesia listed company, PT Indomobil Sukses TBK.

 

Problem

This purchase allows Gallant Venture to hold a majority share in PT Indomobil Sukses, at 52.35%. The profit and loss of Indomobil could be consolidated into the Group Financial Statement. It is important to look at the target company.

What should common shareholders do?

 

Analysis

PT Indomobil Sukses (IMAS)

1)      Gross Margin and Profitability

Is the company profitable?

From the profit and loss statement Gross Margin and Profit Margin is as follows

2012* 2011 2010 2009 2008 2007 2006 2005 2004
12.2% 12.5% 12.7% 13.0% 13.0% 13.6% 15.8% 13.1% 12.8%
4.6% 5.2% 4.1% 1.7% 0.3% 0.0% 0.0% 0.8% (1.4%)

*last twelve months as data is from sept 2011 to sept 2012, while remainder years are for jan to dec

Table : Profitability

The above profitability gives an instant feel of the profitability of the company, prima facie, the company has stability in the top of the line gross margin and returns positive net profit except in 2004.

Scorecard : Add 1 point

a)      Cash Flow

Does the profitability translate into operating cash flow?

2012* 2011 2010 2009 2008 2007 2006 2005 2004
Outflow Outflow Outflow Inflow Outflow Outflow Outflow Outflow Outflow

Table : Operating Cash

The business doesn’t appear to be funding itself from its operations over the period .

Scorecard : Deduct 2 points

Looking deeper,

2012* 2011 2010 2009 2008 2007 2006 2005 2004
Outflow Outflow Outflow Inflow Outflow Inflow Outflow Outflow Inflow
Inflow Inflow Inflow Outflow Inflow Inflow Outflow Inflow Inflow

First row : Investing Cash, Second row: Financing Cash

It appears that the business is into financing itself through financial means. However, it is also demonstrating a continuous willingness to invest and the financial institutions and other debtors are willing to continue lending.

Scorecard : Add 1 point.

b)      Free Cash Flow

What about the free cash flow status of the firm?

The table below shows the free cash flow over the period of analysis. The numbers are in millions of IDR dollars.

2012* 2011 2010 2009 2008 2007 2006 2005 2004
(2.702) (1.879) (1.619) 0.724 (0.256) (0.160) 0.053 (1.143) (1.013)

 

Table : Free Cash Flow

A glance of the table clearly indicated that the firm is not regularly making free cash flow. The firm is making less frequent positive free cash flow than negative free cash flow.

Scorecard : Deduct 1 point

This confirms that on paper the firm is making money, it is really spinning on bank financing (as seen from cash flow statement) and payables financing?

The table below is payables,

2012* 2011 2010 2009 2008 2007 2006 2005 2004
0.440 0.707 0.715 0.158 0.259 0.166 (0.125) 0.055 0.128

Payables : Accounts payable and accrued expenses.

Table : Payables

The table of payables indicated increasing payables, only year 2006 that the company manage to reduce its payables. It is arguable that payables increased because the companying is also expanding its working capital to increase its profit. On paper profits did increase. The table below is computed net working capital change,

2012* 2011 2010 2009 2008 2007 2006 2005 2004
(0.718) 1.698 0.494 0.108 0.215 (0.413) (0.244) (0.172) 0.145

NWC = (Current Assets Change – Current Liabilities Change)

Table : Net Working Capital Change

It can be surmise that 6 out of 8 years payables the business is also supported by business partners.

Scorecard : Deduct 1 point

2)      Asset Utilization

According to the annual report, the business is into automotive, financial and rental. The following ratios are considered important as compared to others

  1. Total Asset Turnover – Idle capacity
  2. Accounts Receivable Turnover – business is not financing itself from its operating cash, but returns a profit
  3. Inventory Turnover – cannot sell
2012* 2011 2010 2009 2008 2007 2006 2005 2004
1.4 1.5 1.7 1.3 1.6 1.1 0.6 1.1 1.4
9.2 6.3 6.3 4.5 4.6 2.9 1.9 3.8 7.8
6.4 7.0 8.3 8.2 12.7 10.9 5.7 9.1 10.8

 

Table : Times turnover

This analysis will not look at the industry average but look at the company performance in isolation over time.

We make use of descriptive statistic to tell us the story

TAT   ART   IVT  
Mean 1.3 Mean 5.3 Mean 8.8
Std Dev 0.33 Std Dev 2.35 Std Dev 2.32
Range 1.1 Range 7.3 Range 7

Table : Statistics

The inference has assumptions,

  1. Quality of the ratio : the lower the standard deviation the higher the quality
  2. Latest financial ratio: Is it above average or is it on par with itself?
  3. The sample is representative of the business (a good sample should be at least 30)

All 3 ratios have high standard deviations, meaning that the quality is low.

The latest financial ratio has 2 out of 3 below it own average.

Score card : deduct 2 points add 1 point

There is a danger of using statistics to understand the business. Firstly, statistics doesn’t tell us the management, and secondly this type of descriptive statistics does not allow abnormal return (due to assumption 2)

3)      Financial Utilization

The following table illustrates the debt to equity ratio. Top row is Total Debt to equity and bottom row is Long Term Debt to equity.

2012* 2011 2010 2009 2008 2007 2006 2005 2004
1.4 0.9 2.7 4.9 8.3 8.8 8.2 8.4 6.5
0.7 0.4 1.3 2.0 3.3 2.5 3.4 4.7 4.0

Table : Total Debt to Equity Ratio

The business is able to take on high debt to equity ratio and appears to have a preference in taking on higher short term financing.

Scorecard : Deduct 1 point

4)      Dealings

The business of owning a business is also about building relationship. The information below shows ownerships

2 key holders of Indomobil Sukses are PT Cipta Sarana Duta Perkasa, and PT Tritunggal Inti Permata. Tritunggal Inti Permata is easy to decipher as it is related to Gallant Venture via the Salim Group. Cipta Sarana Duta Perkasa (henceforth Cipta) was the legal owner of Indomobil since it was restructured in 2002.

According to The Jakarta Post, 22 Jan 2002, the story goes that there could be dealings during the restructuring, as the speculation that Indomobil tender to a consortium of investors at an allegedly discounted price might not be in order. This consortium of investors called Cipta included Lautan Luas (majority), Parallax Capital(second)  and Multi Internasional (others) .

a)      Lautan Luas

Lautan Luas annual report 2011 listed Distribution, Manufacturing and Support & Services as its business segments. It appears that its basic business is chemicals. Why would it be interested in the automobile business?

b)      Parallax Capital

Gallant Venture annual report 2011 clarified Parallax Capital Management is entirely owned by Eugene Cho Park and Edan Cho Park, who owns Parallax Venture Fund that in turn has a stake in Dornier Profits. PV fund has more than 20% interest in Dornier Profits. A Salim is deemed to have interest in shares owned by Dornier Profits in Parallax Venture Fund.

c)       Multi Internasional

Multi Internasional is another mystery.

There is a possibly permutation to the inference of the dealings including rising money from the market left hand to pass to right hand aka somewhat trying to buy itself out?

5)      Market

The chart below is a comparison of Indomobil and Jarkarta market index.

Gallant Venture Indomobil Sukses Internsional Jarkarta Market Index

Fig : Share Price and Volume from yahoo

The share appears to have outperformed the Jarkarta market index for the past 2 years. The share price was trading at approximately 5200 IDR and it closed at 5400 IDR on 8 March 2013, which is the expected offer price proposed by Gallant Venture.

The historical share price from 2013 back to 2004 exist a continuous period where the share price underperforms, then around 2010, the share price outperforms.

Scorecard : Add 0 point

Gallant Venture Limited

6)      Gallant Venture Capital Structure

It is important to study the Capital Structure of Gallant Venture as common shareholders will be affected in the following ways,

  • cash from common shareholders through 1 for 1 rights share (S$675.3 million),
  • issue of convertible bonds (S$80million),
  • issue of non-convertible bonds (S$104.7 million),
  • loan from financial institution (S$128.2 million).

The new capital structure included fresh money of S$803.5million of which common shareholders participated in only $675.3 million. Common shareholders stand to lose 16% stake of the company if this motion goes through.

Scorecard : Deduct 1 point

7)      Dividend

Gallant Venture did not distribute dividend to ordinary shareholders but did distribute dividends to non-controlling interests.

Gallant Venture may not find a good reason to start distributing dividend to ordinary shareholders after doubling its shareholder base.

The acquisition is as large as Gallant Venture (in terms of market capitalization, $660million as at market close 8 March 2013); and Indomobil Sukses is not making spare cash. Interestingly, equity attributable to holders is only S$1,278,116 (annual report 2011).

Scorecard : Deduct 1 point.

8)      Conclusion

Prima facie, it would appear that the serious common shareholders should sell away their shares and stay away from Gallant Venture. It appears that the major shareholder is looking at other synergies. Question is, why sponsor them?

Total Score : Don’t bother…

Disclaimer

This essayis fictitious with unlimited mistakes; the writer can’t read, comprehend and write properly. Don’t spend too much of time on this essay on Gallant Venture Indomobil Sukses Internasional.

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