Recompound Investment Team: ADMF
A look into a company we invested
Disclaimer: this is not an equity research report and it is not a buy, sell or hold recommendation on any mentioned stock. This article is co-authored with Gupita Candra, one of our investment analysts. Views mentioned in this article is the authors’ views solely for the purpose of education and should not be construed as financial advice. Views presented also do not necessarily reflect the view of Recompound as a company.
We also have decided to make part of this newsletter paid because it contains information that gives out our investment edge. Remember, there is no free lunch in the stock market. If you find information floating around that promises you to be rich, be sure to be extremely skeptical.
Warning: this article is a longer read than usual. If you are used to watching YouTube Shorts or Instagram Reels, you might have to mentally prepare yourself. Hopefully the knowledge you gain from this article would outweigh the pain of reading. If you have questions, please feel free to reply to this email. With that, let’s kickstart this article.
As per late 2023, we think that fair intrinsic value of ADMF is at Rp 19T and it has 1,000,000,000 shares. By that calculation, we opine that fair share price should be Rp 19T / 1,000,000,000 = Rp 19,000.
❗Important: The above intrinsic value opinion is not important. The intrinsic value can change if the business changes significantly in the event of notable events. These include:
Significant change in business model
Significant shift in customer behaviour
Policies that significantly disrupt business activities
and so on
But contrary to popular belief, intrinsic value mostly don’t change if the share price breaks a key support level or
a fearmongering or greed creating news that surface like a wild pokemon
Business Model
PT Adira Dinamika Multi Finance Tbk (ADMF) is a financing company. The model of a financing company is simple.
Imagine a fictional character Alex wants to buy a new car. Since everybody is talking about BYD, let’s talk about the all new Toyota Prius that has a solar panel at the top.
After watching the car review by MKBHD, Alex is in love with this car and he wants it badly. So he goes to his favourite car dealer, Bob, with the intention of buying it.
Alex: “Hi, I’d like to buy the all new Toyota Prius”
Bob the Dealer: “Cool, it sells for Rp 300 mio”
Alex (thinking): “Aw darn, I only have Rp 100 mio in my bank account right now”
Bob the Dealer: “I can read your mind, don’t worry we have Adira as one of your financing options”
So Alex opens the adiraku app and submits his application, he will have his Toyota Agya as his collateral (worth Rp 60 mio) and when the application is approved, Adira will purchase the car upfront for Alex. Then Alex will only need to pay in instalments to Adira based on Alex’s finances (lets say in 24 months).
How does Adira makes money then? Well, Alex needs to pay Adira Rp 300 mio + interest. The interest in this case is 20%. So in total, Alex needs to pay Rp 360 mio, divided by 24 months which is Rp 15 mio per month.
In 2022, Adira charges about 13-17% of interest for new 4 wheel (4W for short) and their revenue comes from the interest paid by Alex the debtor. So to recap, if we construct a diagram to represent the relation, we see that Adira makes money from Alex through interest in exchange for financing.
As a matter of fact, Adira is very experienced in doing financing. Leasing process can be done in less than one day thanks to Sistem Layanan Informasi Keuangan (SLIK) by OJK. They also finance a wide variety of products that Alex might want to buy such as:
New Cars (4W)
Used Cars (4W)
New Motorcycle (2W)
Used Motorcycle (2W)
Furniture
Umroh
Gadget
Wedding
Bulk of their financing business, however, is in automotive products so we’ll primarily focus on that. The table below is a 2022 snapshot of interest and their average selling price (ASP) per category.
So how does the company calculate and account for the money they make exactly? The revenue of the company can be computed as follows:
Lets make sense of the equation by providing a concrete example. Btw, the scary looking greek symbol sigma just means summation (”=sum()” in excel).
On a given year, Adira provides new financing (e.g. to Alex) and payments will be made by the debtors. Let’s say in total Adira provides Rp 100T worth of financing and 10% of it has been paid because instalments start immediately (Alex immediately starts paying for his new Toyota).
That means, Rp 100T * 10% or Rp 90T is Adira’s outstanding receivable. Outstanding receiveable is only a fancy term to say that Adira is expecting to receive Rp 90T worth of money in the future.
What counts as Adira’s revenue? It is that Rp 90T multiplied by the interest that is charged (let’s say 10%). This means that Adira’s revenue is Rp 9T.
However that is not all. Instalments begin immediately but does not have to end on that same year. In previous years, Adira might provide financing as much as Rp 80T. Lets assume in the current year, 25% of that financing has been paid. Which means, Adira has an outstanding receivable of Rp 60T (Rp 80T * (100% - 25%)).
What counts as Adira’s revenue? It is that Rp 9T that we got earlier plus Rp 6T (Rp 60T times 10% interest) which gives us Rp 15T.
Now just to make things crystal clear, we have 3 types of financial metrics here:
Outstanding receivable: this is the total amount of payment Adira expects to receive from its customers from its financing activities. For simplicity (assume Alex is the only customer), this comprises total financing minus payment that has been collected from Alex (e.g., 360 mio for Prius - instalment money collected from Alex so far).
Revenue: is outstanding receivable multiplied by interest Adira expects to receive from from Alex
Profit: this is the revenue minus the cost (more about the cost later). The profit is what we are concerned with as an indicator of how financially healthy Adira is as a company
Kudos for reading and re-reading the previous paragraph, because now you have conceptually understood how Adira accounts for their revenue. Now let’s put in some real figures.
From the outstanding receivable, we can derive the revenue based on interest that is payable to Adira (multiply each financing that has not been paid by the interest) and obtain the revenue track record.
For each segment of financing, there is a cost that is associated. We will discuss about the cost structure in the later part of the blog. But once we figure this out, we can calculate the profit per each segment of financing displayed below.
From the numbers above, we can highlight a couple of trends (insights).
Financing of Cars
I think based on the profitability chart, we could quickly gloss over the fact that their financing for cars is increasing. It also has an increasing portion of their total financing as a whole. What probably warrants more discussion is Adira’s financing of motorcycle because its profitability seems more concerning.
Financing of Motorcycle
Financing of motorcycle has good margins and return of capital and it follows that this is an important segment for Adira.
Note: Return of capital means the net amount of money you get back as a fraction of the capital that you have put in.
This is calculated by net earnings (for a segment) divided by the amount of capital
However, the outstanding receivable of motorcycle has declined in 2021 and 2022 compared to 2019 and previous years. This might be caused by drop in motorcycle sales due to COVID (bad but expected) or a drop in Adira’s market share in motorcycle financing (bad). Let’s take a look at the motor cycle sales in Indonesia over the years.
As expected, we can see that there is a dip in motorcycle sales due to COVID-19 where we see there is a significant drop in sales volume from 2019 and that figure has not fully recovered even in 2023. But what we think can be a negative point for Adira is their market share for motorcycle segment is declining. If we note other big multi finance players in the industry and look at their financing, we get the following tabulated data:
For new motor financing, we can see that Adira experiences a drop in market share by 33%. This might seem to be a lot, however, big players as a whole also experience a decline in market share from 49% to 39% which is about 20%.
What’s more concerning is in the market of used motorcycle financing where Adira’s financing declines from 2016 onwards to 2022. This seems to be eaten by Astra’s FIF that experiences a whopping jump from Rp 7T in 2016 to Rp 12T in 2022. This decline in market share in the motorcycle segment for Adira is something that we always keep an eye on. While the official numbers are not yet confirmed, our field survey shows a good sign. We scuttlebutt to a number of motorcycle dealers. Out of 5 dealers, 3 - 4 refer Adira as a financing option and 2 mention “just use Adira”.
Furthermore, durable goods segment is offsetting the decline of motorcycle segment. The durable goods segment covers financing of gadgets, furniture, and so on. This development of new segment of financing is perceived as a good sign showing business resiliency and expansion.
Cost Structure
Cool, so now we have learned the numbers of Adira’s business and how it gets its income. However, a business won’t be operational indefinitely if it’s not profitable and burning money. So the revenue it gets must be larger than its cost. What are the cost involved of operating Adira?
Illustrated very simply, Adira takes loans from funders (the entity that gives out money to Adira). But the money is not given out for free, in other words it has a cost in some form. This is Adira’s important cost of running the business, so we have to make sense of it well. We will cover 2 sources of funds which are interest bearing debt and joint financing.
Interest Bearing Debt
As a matter of fact, Adira takes on interest bearing debt from the public. Screenshot below, shows some examples of corporate bonds they issue that you and I can purchase, along with its due date and payment terms.
So when the bond is due, Adira needs to pay lenders the promised fees (if they do not default) because they owe lenders money. Now intuitively, it makes a lot of sense that customers need to pay a larger interest to Adira so that Adira can pay off its interest bearing debt.
As investors, how do we know if the interest bearing debt is too high or too low percentage wise? Is Adira borrowing too much, too little or just enough money? It may seem not very clear cut on how we should do this.
Well, what we can do is we see the aggregated all of the interest expense and financing charges and see it in comparison to the total financing and total third party funds.
We define cost of fund as the interest expense relative to third party funds (funds that are raised from externally for example in the form of debt).
Where “T total” refers to total third party funds that are raised and “I” refers to total interest expense.
We then define cost of financing as the interest expense relative to total financing that is issued by the company.
Where “F total” refers to total financing.
The graph plots these two metrics overtime and we can deduce some insights from the trend.
In my view, there should be a healthy gap between cost of fund and cost of financing. If cost of financing is very close in value with cost of funds, this means that total financing is mostly using third party funds (that is more costly). In contrary, if cost of financing is notably lower, this means that financing is done using the company’s own cash (less costly because you don’t have to pay interest on your own cash).
The fact that the graph shows that there is a healthy decline in cost of fund in tandem with cost of financing after the pandemic also shows that Adira is using less margins to finance their operations.
Joint Financing
Joint financing refers to a cooperation between a bank and a partner. A bank in this case is Bank Danamon where the partner is Adira. Adira would provide a financing service to end consumer (remember Alex?) and a portion of that fund would be from the Bank.
Adira has a joint financing agreement with Bank Danamon Tbk, started in 30 April 2004 (with amendments made in 14 February 2017). In the contract, Bank Danamon can finance up to 99% of the financing portion to Adira’s customers. Bank Danamon is also able to set interest that is charged to consumers.
The key takeaway of this joint financing activity is that Adira is able to finance to Alex (end consumer) with a portion of the Bank’s money. The “drawback” is that interest that is charged to consumer might be lower and Adira would not get the full amount from the receivable as they will go to Bank Danamon.
To wit, revenue yield from self financing of motorcycle is 35% while revenue yield from joint financing of motorcycle is around 25%.
Why does Adira want to go into this arrangement then?
Put simply, Adira will be able to gain access to funds to serve more people and be able to exert more market dominance. Imagine this, Adira has Rp 100 in terms of funds to finance people in buying their dream car. With this Rp 100, Adira can only help Alex to buy his dream Toyota Prius. So Adira’s market is only Alex.
Now imagine Bank Danamon coming along saying:
“Hey, I can join you in financing your customers. Let’s do 50 - 50. If your customer needs 100, you finance 50 and I will finance 50. Then we share the revenue you get from them”.
All of the sudden, Adira only needs to disburse Rp 50 to Alex while Bank Danamon can disburse the remaining Rp 50. So when Charlie comes along to Bob the dealer saying that he also wants to buy a Prius but needs financing, Adira can disburse another Rp 50 with Bank Danamon (disbursing Rp 50). Boom, with a snap of a finger Adira has just doubled its market share.
Joint Financing Revenue Structure
But of course, Adira needs to give Bank Danamon something in return for kindly allowing Adira to serve more customers and expand its market share. It’s a business agreement anyways, so both parties need to benefit (win-win). Also, not all of Adira’s financing is joint financing. A portion is self-financed and it is actually more profitable to do self-financing instead of joint-financing. So Adira’s management needs to consistently strike a balance between self-financing and joint-financing. If we plot the % of financing is self-financing, we would obtain the figure below.
Based on the graph, it is clear that self-financing portion is on the decline from 2013 - 2022. But how do we make sense of this information? Let us dig even deeper and discuss the concept of revenue yield.
We previously calculated that revenue is obtained from outstanding receivables multiplied by interest. We can get the gross revenue yield by dividing gross revenue with total financing. To put it succinctly:
But as mentioned, for joint financing, not all of the revenue goes to Adira. Some will be paid to Bank Danamon. So in this case, before we divide with total financing, we will have to subtract it with revenue that is payable to Bank Danamon and get the net revenue yield. It can be succinctly can be displayed as follows:
Lastly, if we want to find the revenue yield for Bank Danamon only, we can simply divide revenue that goes to Bank Danamon divided by total financing as follows:
Once we have grasped these yield figures conceptually, we can plot the data in a chart and get a trend as follows.
As shown by the graph, we can see that there is an overall increase in the gross revenue yield and the Bank Danamon’s yield is on the decline. To me as an Adira investor, this is a good thing because you do not want to be sharing too much of your revenue to other people as your business grows.
General Administrative Costs
Now lets gloss over the general administrative costs and see the trend over the years. After all, organisation is made up of people. We want to see cost associated with running the organisation and evaluate the management’s prudence in managing their workforce. The things we look for Adira are as follows:
Trend of number of employees
Trend of average salary per year
Financing amount per person (this measures productivity)
For Adira, number of employees is on a downtrend. In 2013, Adira employed around ~29,000 people. In 2022, the number has gone down to ~17,000. If we look at this figure alone, we can conclude either the company is downsizing (sunset) or the company has successfully been implementing effort to increase labor productivity.
We can examine the chart that plots the average salary per year and the amount of financing per workforce below.
The graph shows that there is an overall increase in average salary per person (6% CAGR). It also shows that the financing per person increases from IDR 1.7 Bio to IDR 2.6 Bio. This figure combined with reduced number of employees signals that average employee in 2022 is more productive than that in 2013. Perhaps it is also a motivational factor for employees that are in the company.
For those of you who work in a company must have felt the same way. Imagine if your company decides to increase your salary overtime and your output has also proven to be increasing. Then the company also rids unnecessary bloat in the organisation that cause inefficiency. It is an important signal for workers to continuously step up their game and strive for more and better output.
Non Performing Loans
Adira is in the business of financing people’s purchases, so you have to deal with people who cannot pay back the loans, a.k.a. loans that don’t perform. The default rate must be low enough so that Adira has cashflow to run profitably.
Remember our story Alex, Bob the dealer and Charlie?
Alex and Charlie bought Toyota Prius from Bob the dealer but used Adira as a financing option. Alex is a good debtor so he pays his instalments on time. Charlie on the other hand, not so much. He ended up defaulting (not finishing his instalments).
Adira needs to take into account for people like Charlie, because if there are too many consumers that default, it would hamper Adira’s ability to earn money. So Adira needs to determine 3 metrics in relation to non performing loans. Those are:
Allowance for Impairment Losses (CKPN)
Write off receivable
Recovery
Allowance for Impairment Losses (CKPN)
Cadangan Kerugian Penurunan Nilai (CKPN) might seem confusing to most people, especially those who never work in a bank or a financial institution. What is this even.
Before I proceed in explaining, you can think of Alex and Charlie as a cash generator to Adira when Adira finances their car purchase. Why? Remember, Alex and Charlie need to pay instalments that include interest. So as a whole, it is quite akin to you buying a fixed rate that promises you to pay your principal back with interest.
But as illustrated earlier, life happens and Charlie from time to time might default. So Adira needs to take into account for this and create a cash buffer in case people like Charlie defaults.
In the balance sheet, CKPN is counted as a cost so it reduces the amount of profits an organisation make. Lets take a look at Adira’s % of CKPN to revenue.
Based on the chart, we can see that there is a downward trend in CKPN allocation relative to revenue. Which means that collection and recovery tends to get better over the past few years. Remember, this is a good thing because CKPN is counted as a cost. So it reduces Adira’s profitability when management decides to increase its value.
Note: CKPN value needs to be treaded with care because too much CKPN reduction can cause solvency issue if there is too much non performing loans.
Intermezzo
Many thanks for reading up until this far. If you have understood the content reasonably well, I’d say you are amongst the less than 1% who reads up about a multi finance company in Indonesia. The subsequent sections are hidden inside a paywall because we think that it constitutes our investment edge. The sections are:
Adira’s competitive advantage
Adira’s growth drivers (short and long term)
Adira’s incentive in giving out dividends
Adira’s business risk
Adira’s key factors that we look out for
We don’t believe in giving out information for free, if you’d like to read on, consider being a paid subscriber. Or you could use this payment link and we’ll send you the paid content to your inbox. Otherwise, have a good day and we hope that you have learned something from this post!
Welcome to the other side! Thank you so so much for becoming a paid subscriber. The previous sections would seem a lot to digest but there are so much more complexity and nuances when it comes to understanding a company. This section would illustrate the more “artistic” or qualitative part of Adira. Some of the things discussed here are editorial in nature and they can change from time to time. With that, here we go.
Competitive Advantage
Adira has been in the game for well over 30 years, founded in 1991 by the man Stanley Setia Atmadja who was CEO. The man grew the company for 15 years and Adira was eventually acquired by Bank Danamon in 2004 (that’s how you also see the joint financing portion) at a Rp 1.1T valuation. In 2009, after the global financial crisis, Bank Danamon increases its ownership by 20% with Rp 7T valuation. The outstanding receivable was at Rp 17T and net profit was at Rp 1T. Pak Stanley eventually stepped down in 2012 and helped to build Mandiri Utama Finance.
Now you might be thinking, “huh, how is this a competitive advantage?”
Well, we think that the company is founded in 1991, it has gone through multiple crises such as the Asian Financial Crisis in 1997-8, Global Financial Crisis 2008-9, and recently COVID-19 2020-1, which affected not only the economy as a whole, but also the lending business. The company has been able to pull itself back and grow pretty much consistently over the years. To us, that is an impressive feat.
We think that there are three pillars that the management executes to achieve this. Those are:
Good and extensive relationship with Dealers (Remember Bob the dealer?).
If you compare leasing companies like Adira to banks (to BCA lets say), banks usually tend to be more passive in getting people to take up loan to finance their medium ticket purchases. Banks often rely on their account officers or relationship officers at the branch to the customers who are interested in buying cars, etc. Whereas leasing companies tend to be more aggressive in getting into people through dealers directly. So for example, if Alex wants to buy a car, he would not go to the bank, he would go to Bob the car dealer. Bob the car dealer would then be incentivised to refer Alex to get a lease from Adira.
Fast and efficient
Banks tend to have a more complicated process in getting financing. Whereas for Adira or leasing companies, you can download one app that is specialised to apply for financing and the process can be done in one working day. When getting financing, people prefer convenience to cheaper interest, why? Because they are paying in instalments anyway. If I pay 10% vs 15% of interest that is spread across 24 months, the nominal difference per instalment is usually not a dealbreaker for most people.
Low cost of financing
Low cost of financing for Adira means that the company would have more capital to add its network effect and presence. Especially in tier-2 cities, the company would be able to hold offline events and the company also could afford to incentivise the sales team more. Physical presence with the right incentives allows Adira to be the top of mind amongst people who need their financing services.
On the contrary, if your cost of financing is high (hint: p2p industry), you will have less room to invest your capital to marketing events that increase your presence and legitimacy as a company. If you do too much of those, you run the risk of not having a healthy balance sheet and going out of business. If you do too little, no body would know who you are and what you do. Is VC the answer then for p2p? Well this is an article about Adira, we’ll get into that in future articles :)
Growth Driver
Short Term
We believe that there is a pent up demand especially for new workers and students who previously do not have to commute to work. Now that COVID-19 lockdown restrictions have been lifted, we are seeing that demand for transportation (motorcycle mostly) is returning back to normal. Those who did not get the chance to buy a motorcycle previously, now have the chance to do so.
As you can see in the motorcycle chart, there is a clear dip in motorcycle sales during the pandemic. This is a no brainer given the lockdowns. But population chart shows that Indonesia’s demographic mostly constitutes of people aged 15-34. That’s a young population who’s in the productive age, likely needing transportation. Therefore, it follows that Adira stands to benefit from this macro trend in the short term as there will be a boost in sales of motorcycle in 2023-2024 to cater to the demand.
Long Term
As it stands, car (4W) ownership in Indonesia remains low. Out of 1,000 people only about 82 people own cars. We expect this number to grow evidently by seeing our neighbouring countries Malaysia and Thailand. Out of 1,000 people in Thailand 280 have cars. In Malaysia, it is 542. Which means if we do the math correctly, it is around 3.4x and 6.6x of car ownership per thousand people compared to Indonesia.
We are betting that Adira should be able to capture this growth trend of car ownership in Indonesia. This is especially so considering that Adira already has a sizeable market share in the motorcycle and car industry.
There are things that could slow down these long term growth potential though, those are:
Ride hailing going out of business.
Increase in car price and tax on car ownership that makes it even more out of reach for most.
Dividends
As investors, we care about dividends a lot. Especially for a mature profitable business like Adira, we want to get yield from holding on to the stocks. Historically, we could see that Adira’s commitment to issuing dividends have been spotless. The company has also been profitable for as long as I can remember. That is not important.
The more important part: is there an incentive for Adira to issue dividends at all? The answer is, we think there is. Why?
Yes, the answer lies in the ownership structure. Who owns Adira? Maybe you do, but most certainly only a little bit. Mostly it is owned by Bank Danamon which stands at ~92% ownership and probably even more if they use nominees (we are not claiming that they do though). So if Adira issues Rp 803 of dividends per share in 2022, there are 1,000,000,000 shares in circulation. This means that Adira would give Bank Danamon Rp 7.4T in cold cash, which directly goes into Danamon’s earnings.
How does making Rp 7.4T more money help an organisation? Well it makes the asset go up but as a bank it reduces the cost of issuing credit. The banks need to always have “cheap” sources of funds to remain competitive and channel them to mortgages, corporate debt, and many more debtors that is out of reach from Adira.
Bonus: Adira’s management seems to have a track record in paying attention to its return of equity (ROE). Meaning, how big the proportion of net profit there is relative to the size of equity (asset minus liability). If company has too much cash, asset goes up and ROE goes down. So the company has a smart mechanism in “clearing away” this cash by giving it out to Bank Danamon. Fyi, Adira’s management seems to have ~20% as an ROE guide. So we can reasonably guess that they will be incentivised to increase their dividend pay out ratio in the event of a jumbo net earnings (hint: this has happened before in the 2010s).
Key Factors We Look out for
We look at the amount of new financing. It needs to be above Rp34T for us to be happy. As a result, outstanding receivable should be above Rp48T. We also look closely at the cost structure to ensure that the net profit margin for Adira is above 17%.
Is the new financing number achievable in 2024? Lets hear from management
Note: the exact number that we get is really an art. There might be a better answer but this is obtained from looking at the company closely and its competitors too.
Risk
Investing in any (Adira included) business is definitely not risk free. Usually the risk involves structurally reduced demand for private transportation (motorcycles and cars) and making cost of operating more expensive:
Massive development of public transport in tier 2 cities that can cater to their burgeoning number of population.
Change in consumer preference to use public transport instead of private transport
Banks being more aggressive in leasing to consumer purchases
Policies that in any shape way or form that are unfavorable to leasing activities. Typically this might be interest rate policies that might “force” leasing companies to issue interest bearing debt with higher interest (more costly margins)
Not to mention, black swan events such as COVID-19 proves to be a major risk to leasing activities. Despite still being profitable, Adira’s net profit dropped by 51% during that time and the share price dropped to its lows at ~Rp3,900. So if there is a person who asks me, how low can ADMF stock price go? My genuine answer is I don’t know.
Likewise, how high can ADMF stock price go? I also don’t know, although I might sell the shares if the stock price goes ballistic. But hopefully you get the point. Looking at stocks based entirely on the price can be misleading. In order to remain convicted, we understand the business and pay attention to risks, key variables, growth drivers and moat. Price volatility and news are almost always noise.
Closing Remarks
Kudos for reading up this far! We hope that this article has given some insights that enable you to have a better understanding of the business. I certainly had loads of fun writing this article and didn't expect it to be this long.
By no means this is a complete picture of the company. But I think this write up serves as a good and brief representation of the company that allows investors to make a more informed decision. Also, when faced with uncertainties such as news, price fluctuation, etc that cast fear or greed to many people’s hearts, we stick to the research, understanding and our investment game plan.
Have a good one!