The transformation of a little know play on Indonesia’s infrastructure growth
How much do
you think the producer of almost half of the steel pipe in Indonesia, the world’s
fourth-most populist country, is worth? I doubt many investors would guess that
it’s just US$100m, however, that’s the current market cap of The Indonesia Steel Pipe Company (ISSP IJ) or "SPINDO", which
produces around 40% of Indonesia’s steel pipe that is used in automotive,
energy, building and infrastructure projects.
Despite
their significance to the construction of a growing Indonesia, the company is
little known even to local investors which sets the stage for this 'value stock' to enter a cycle of rapid earnings growth.
We have
closely followed SPINDO since 2018 and our original thesis ‘A Strong Recovery’ published in October 2019 was based on efficiency gains and higher
value product mix improving gross margins while restructuring the balance sheet
will further drive earnings growth.
While the onset of COVID delayed a transformation that was already underway, the subsequent economic stimulus through infrastructure spending has created a market environment that is accelerating SPINDO’s transformation beyond our original expectations.
Our latest thesis
‘Transformer’ has been updated following the publication of the company’s
FY20 results and inaugural conference call earlier in April to reflect
the current landscape and positive outlook.
While net margins have already recovered from an FY18 low of 1.1% to 4.7% last year, we expect they will continue growing to 8.4% by FY22 resulting in a 51% earnings CAGR through FY22 based on just 7% volume growth, which is broadly in-line with GDP. That means the current PER of just 8.6x will fall to 3.8x in two years.
Those few investors and local analysts who’re not totally asleep at the wheel seem paralysed by the company’s poor profitability and low growth following the FY16 downturn.
With bumper
1Q21 results just around the corner, FY21 is set to be the year SPINDO
investors began to look forward rather than backwards.
