Disclaimer: this is not an equity research report and it is not a buy, sell or hold recommendation on any mentioned stock. 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. Purpose of this blogpost is to highlight a brief overview of our thought process of getting a better picture of a public company.
PT Total Bangun Persada Tbk. is a privately owned (non-government) construction company in Indonesia.
It specializes in building commercial high-rise & office buildings.
If you live in Jakarta, you should not be a stranger to some of their high profile projects:
Central Park
The Pakubuwono Residence
Astra Tower
Pondok Indah Mall 3 & Office Tower
I have to admit, the term “construction company” may not have the best reputation in Indonesia. This is understandable, considering the negative news surrounding them (especially so for state-owned ones):
At a glance, construction sector is one of the hardest-hit sectors by COVID-19 because mobility and outdoor business activities were greatly reduced. Consequently, their earnings plummeted, including those of TOTL (all figures in the table below are in billion IDR).
Fast forward to 2023, mobility and outdoor business activities recovered. TOTL was able to turn around its earnings, while most of its state-owned peers are still struggling (all figures in the table below are in billion IDR):
Same business model, different outcomes in their earnings (and consequently, their long-term stock price performance). How come?
Company Profile & Structure
Total Bangun Persada was initially established under the name PT Tjahja Rimba Kentjana on September 4, 1970.
To this day, the company has been engaged in construction business for more than 50 years. In 1981, the company restructured its business and changed its name into PT Total Bangun Persada Tbk.
They officially became public on July 25 2006.
When analyzing a company, it is of paramount importance to be familiar with the people who run the company. Specifically, we are interested in finding out TOTL’s Ultimate Beneficial Owners (UBO).
UBOs are the people who ultimately owns and controls the company. Therefore, it is very important to us that these people:
Have good track record
Are competent in running their business
Are fair to their minority shareholders (like us!)
As the saying goes: “Good people make good times possible” 🙂
Let’s first take a look at their shareholder composition list:
PT Total Inti Persada is the majority shareholder of PT Total Bangun Persada Tbk.
Let’s find out the controlling shareholders of PT Total Inti Persada (TOTL’s controlling shareholder):
…And here is the list of directors and commissioners of PT Total Inti Persada (TOTL’s controlling shareholder):
Let’s move up 1 more level, who are the controlling shareholders of:
PT Bumi Permata Pratama
PT Jaga Bangunpersada Komajaya
PT Anugerah Kencana Jaya ?
PT Bumi Permata Pratama (TOTL’s 31% shareholder)
Here are the controlling shareholders of PT Bumi Permata Pratama:
PT Bumi Permata Pratama is owned by these 2 gentlemen:
Husein Susilo Tjioe
Karel Budiman
We did a bit of a background check and found these interesting data points:
From the datapoints gathered, suffice to say that PT Bumi Permata Pratama is a company owned by Salim group’s trusted hands.
This is further proven by this data:
Anthony Salim (the head of the conglomerate Salim Group) owned TOTL in 1998, before he got replaced by PT Bumi Permata Pratama.
PT Anugerah Kencana Jaya (TOTL’s 38% shareholder)
Due to data limitation, it is unclear who are the owners of PT Anugerah Kencana Jaya. However, we can make an educated guess that these 2 gentlemen might have significant shares in PT Anugerah Kencana Jaya:
Pinarto Sutanto is a commissioner in PT Anugerah Kencana Jaya, while Wibowo is its director.
Both are also TOTL’s current commissioners:
It is not clear whether both gentlemen are affiliated to each other.
But one thing for sure: both are early employees of TOTL who managed to climb the corporate ladder and they became key figures in TOTL and the entity that owns TOTL.
PT Jaga Bangunpersada Komajaya (TOTL’s 31% shareholder)
“Komajaya”… Sounds familiar?
If you notice, Liliana Komajaya and Rudi Komajaya are commissioners in both TOTL and TOTL’s controlling shareholder PT Total Inti Persada.
TOTL’s current president director is also a Komajaya:
All three, Liliana, Rudi, and Janti, are second generation Komajayas within TOTL’s business.
Its first generation is Ir. Komajaya. He is one of the founding fathers of TOTL:
Here’s what’s worth highlighting about the Komajaya family:
They are a family of professionals with deep roots in Civil Engineering, except for Liliana, who has an accounting background.
This is shown in their CVs:
TOTL’s Simplified Ownership Structure
Here is TOTL’s simplified ownership structure which highlights its Ultimate Beneficial Owners (UBO):
TOTL’s Board of Directors
TOTL has 5 directors to run their business.
Out of 5 directors as far as we can tell, only Janti Komajaya is affiliated with the UBOs. The rest are professional Civil Engineers:
Moeljati Soetrisno:
Saleh:
Lio Sudarto:
Rasyid Daulay:
Key Takeaway on TOTL’s Company Structure
From these data points alone (company structure and portfolio projects), without even looking at its financial numbers, I can already hypothesize that TOTL is a well-run company.
It is a group of Civil Engineering veterans excelling in their field: constructing buildings, with reputable owners overseeing their operations as a whole.
Why do I consider TOTL a superior relative to other publicly listed construction companies? Because, believe it or not, there are numerous directors in Indonesian public companies whose roles do not necessarily align with their expertise.
For instance, the president director of a state-owned construction company may have a background in investment banking instead.
So, does TOTL’s management fulfill the three criteria I mentioned above?
Have a good track record.
Are competent in running the business.
Are fair to their minority shareholders (like us!).
I can confidently say from looking at the board of directors and UBOs, criteria 1 is good. To confirm 2 and 3, let's analyze its financial performance and their capital allocation.
Before delving into the financial numbers, let’s first explore how TOTL makes money as a business. We do this by examining its business model.
Business Model
Here’s how TOTL (or other construction companies in general) make money:
TOTL participates in the project tendering process with various potential customers.
TOTL wins the tender and is awarded a contract by customers.
TOTL hires sub-contractors and sometimes covers their raw materials.
TOTL coordinates and executes the project with their sub-contractors.
Using the “progress payment” scheme, the customer pays TOTL gradually based on agreed-upon project milestones.
Note: For a construction company, choosing the right payment scheme is crucial for long-term sustainability. This will be further elaborated in a later section.
Looks simple? Indeed! The construction business is inherently a service business.
A typical service business usually has the following characteristics:
Dependent on reputation & client relationship: Reputation is crucial, as word-of-mouth, reviews, and customer satisfaction directly impact success. Building a strong reputation can lead to increased trust and business growth.
Labor-Intensive: The skills, expertise, and interactions of employees are critical to success. Therefore, the majority of a construction company’s costs should come from employee salaries and sub-contractor fees.
Little to no fixed asset: A successful construction company should have little to no fixed assets (factories, buildings, machinery). Its primary assets should be the skills and expertise of its employees.
Therefore, for TOTL to succeed sustainably long-term, it is crucial for them to:
Maintain highly skilled and experienced civil engineers.
Foster good relationships with their sub-contractors.
Uphold a strong reputation among their clients.
Revenue Drivers
After examining its business model, TOTL’s revenue driver is straightforward:
How much new contract value has TOTL secured with its clients?
Fortunately, these figures are publicly disclosed in TOTL’s annual reports and are also available through mainstream news outlets.
The chart below depicts TOTL’s new secured contracts compared to its revenue from 2016 to 2023:
By analyzing long-term data, it becomes clear that TOTL’s revenue lags behind its newly secured contracts.
This is because when TOTL secures a new contract in a particular year, it typically takes several years to complete the entire project. Revenue is recognised gradually as project milestones are achieved.
Key takeaway:
Given the fact that revenue lags behind “New Secured Contracts,” we can actually use this figure to forecast TOTL’s future revenue and earnings without the need to waiting for TOTL's official earnings release!
Cost Drivers
The pie chart below shows TOTL’s cost drivers as a percentage of their revenue:
Out of a total revenue of 3,453,279,867,000 IDR (including income from joint ventures with other construction companies):
77% was used for paying sub-contractors.
5% was used to pay employee salaries and bonuses.
Leaving TOTL with the remaining 18% as their gross profit.
After accounting for other expenses (taxes, etc.), TOTL is left with ~6% as its net profit!
Low net profit margin companies face several challenges that can impact their long-term sustainability and growth potential. Here are some of the key problems:
Vulnerability to cost increases: Companies with low net profit margins have less room to absorb increases in costs, such as raw materials, labor, or operational expenses. Even a small rise in costs can significantly impact profitability.
Limited buffer against economic downturns: During economic downturns, low-margin companies usually have less financial cushion to weather reduced revenues. This can lead to financial distress or even bankruptcy if the downturn is prolonged.
Reduced investment capacity: Low-profit margins mean less retained earnings, which limits the company’s ability to reinvest in growth opportunities, research and development, or capital improvements. This can hinder long-term competitiveness.
High operational risk: Low-margin businesses typically operate with tighter financial controls and less room for error. Operational inefficiencies, mistakes, or unforeseen expenses can quickly erode profitability.
Debt Servicing Issues: Companies with low profit margins have less income available to service debt. High levels of debt can become unsustainable, leading to financial instability.
Overall, low net profit margins can create a precarious financial position, making it crucial for such companies to manage costs meticulously, optimise operations, and find ways to enhance revenue and margins wherever possible.
However, there are admirable aspects of TOTL’s performance:
They survived the worst possible period for construction companies, which was during COVID-19, a time when outdoor economic activity drastically reduced.
Not only did they survive, but they also managed to remain profitable with a 4% margin during 2020-2022.
Fast forward to 2023, they managed to recover their revenue to pre-COVID levels, while securing an all-time high level of new contracts at 4.2 trillion IDR.
All this while their state-owned peers are still struggling with negative net profits.
So, what makes TOTL special?
What did the management do to navigate the company through turbulent times?
What’s their “secret sauce”? Let’s find out down below 👇🏼
“Secret Sauce”
Debt Free
If you look at your financial apps like RTI or Stockbit, you may notice that TOTL’s current Debt to Equity Ratio (DER) is 211%, significantly above the 100% mark:
By all accounts, TOTL should face liquidity issues during challenging periods like the COVID-19 pandemic, right? Not quite. TOTL survived and even emerged stronger. How come?
The answer lies in the type of debt that TOTL holds on their balance sheet: they have zero interest-bearing debt!
Interest-bearing debt is money that a company borrows and must repay with interest. This type of debt can threaten a company's livelihood because interest payments must be made regularly, regardless of financial performance. If a company’s income drops, it might struggle to make these payments, and its assets could be impaired by debt issuers, such as banks, to cover the interest costs.
This demonstrates the prudence of TOTL’s management. They are well aware that their net margin is already thin due to substantial fixed costs for paying sub-contractors and employees.
With zero interest-bearing debt, TOTL fares a much greater chance of surviving tough periods like COVID-19.
Prudent in Selecting Their Customers
Inherently, TOTL is a B2B service business with high ticket size.
Therefore, it is of paramount importance that they choose their customers prudently.
They need to make sure their customers always pay on time, otherwise TOTL would not be able to cover their daily operations cost.
The management are well aware of this issue, this is why ~60% of their customers are repeat customers. Due to their business nature (low net profit margin & high fixed cost), they cannot afford to be reckless when acquiring new customers:
Fun fact:
The last time TOTL handled government projects was in 2015. After that 100% of their customers are from the private sector:
We think that TOTL might not be engaging in government project to reduce political risk if change in leadership might affect state owned enterprise’s ability to pay their contractors. Which we think is a fair thing to do given that we are a democratic country with regular changes of political leadership.
Favorable Payment Scheme From Their Customers
Another reason why TOTL has always been able to maintain a healthy financial performance is due to their favorable payment scheme called “Progress Payment”.
For your context, in the construction business, there are 2 types of payment scheme: “Turnkey” and “Progress Payment”:
Turnkey
A turnkey project is a type of contract where a company is hired to complete a project from start to finish. The final product is delivered to the client fully operational and ready for immediate use. Full payment is only made when the entire project is completed and handed over
Example: Suppose you hire a construction company to build your house. They handle everything: design, permits, construction, and interior setup. Once they finish, you pay them the agreed upon service fees
Progress Payment
A progress payment project is a type of contract where payments are made at different stages of the project as work is completed. Instead of paying the full amount at the end, you pay in increments as specific milestones or phases are completed.
Example: Imagine you hire a contractor to renovate your kitchen. You agree to pay a certain amount after they finish demolishing the old kitchen, another amount after installing the new cabinets, and the final payment after completing all the work.
Turnkey projects are far more risky compared to Progress Payment ones, for the following reasons:
Full responsibility: In turnkey projects, the contractor takes on complete responsibility for the entire project from start to finish. This includes design, permits, construction, and delivery of the final product. If anything goes wrong at any stage, the contractor bears the full brunt of the risk.
Upfront costs: The contractor must cover all costs upfront, including materials, labor, and any unexpected expenses. If these costs exceed initial estimates, the contractor may incur significant losses.
Uncertain variables: Turnkey projects often have many uncertain variables, such as changes in material prices, weather delays, or unforeseen site issues. These variables can lead to increased costs and project delays, all of which the contractor must manage without additional compensation.
Delayed payment: The contractor usually receives full payment only upon completion of the project. This means they must finance the project until it is entirely finished, which can be financially straining, especially for long-duration projects.
Quality assurance: Ensuring the final product meets the client's expectations and standards can be challenging. Any failure to meet the agreed-upon specifications can result in penalties or the need for costly revisions.
Fortunately, TOTL’s management are well aware of this.
They only handle projects with Progress Payment scheme.
Strong Bargaining Power Against Their Sub-Contractors
In addition to having a great reputation among their customers, evidenced by a multitude of repeat customers and favorable payment schemes, TOTL also has strong bargaining power over their sub-contractors.
While we do not come from a construction background and therefore cannot directly survey TOTL’s sub-contractors, we can demonstrate this quantitatively by examining TOTL’s "Cash Conversion Cycle (CCC)."
What is the Cash Conversion Cycle (CCC)?
The Cash Conversion Cycle (CCC) is a metric used to measure how long it takes for a company to turn its investments in inventory and other resources into cash through sales.
Think of it like this:
Imagine you own a lemonade stand. The CCC would be the time it takes for you to do three things:
Buy ingredients: How long it takes to buy lemons, sugar, and cups (Inventory).
Sell lemonade: How long it takes to sell the lemonade to customers (Sales).
Get paid: How long it takes to collect the money from customers who might not pay immediately (Accounts Receivable).
Steps in calculating CCC:
Days Inventory Outstanding (DIO):
How many days, on average, you hold onto your inventory before selling it.
Example: You buy lemons and hold onto them for 5 days before making and selling the lemonade.
Days Sales Outstanding (DSO):
How many days, on average, it takes to collect cash from sales.
Example: After selling the lemonade, it takes you 3 days to collect the money from customers.
Days Payable Outstanding (DPO):
How many days, on average, it takes to pay your suppliers for the ingredients.
Example: You buy lemons and have 7 days to pay your supplier.
Calculating CCC:
Example with Numbers:
DIO (Days Inventory Outstanding): 5 days (you hold inventory for 5 days)
DSO (Days Sales Outstanding): 3 days (you collect cash 3 days after sales)
DPO (Days Payable Outstanding): 7 days (you pay suppliers after 7 days)
Therefore:
What Does It Mean?
1 day: This means it takes you just 1 day from buying ingredients to getting paid by your customers after accounting for the time you can delay paying your suppliers.
Shorter CCC: Better for business, as it means you get your cash back quickly.
Longer CCC: Not as good, as your cash is tied up longer in the process.
Why is CCC Important?
It shows how efficiently a company is managing its cash flow. A shorter CCC means the company can quickly turn its resources into cash, which is crucial for maintaining a healthy business.
Now let’s calculate TOTL’s CCC.
In the case of TOTL:
Days Inventory Outstanding (DIO):
Recall that TOTL is a service business with no need for inventories
Therefore its DIO will be 0
Days Sales Outstanding (DSO):
How many days, on average, do TOTL need to collect payment from their customers
Days Payable Outstanding (DPO):
How many days, on average, do TOTL need to pay their sub-contractors. In TOTL’s case, the “suppliers” are basically their sub-contractors.
Crunching some numbers:
TOTL’s Cash Conversion Cycle (CCC) has been consistently negative over the years!
The CCC being negative indicates that TOTL collects payments from its clients before it has to pay its subcontractors and suppliers, which essentially means TOTL has a favorable working capital position.
TOTL’s negative Cash Conversion Cycle (CCC) is indeed a remarkable achievement, especially in the construction industry where managing cash flow is critical due to the nature of the projects and their timelines. This scenario is advantageous for several reasons:
Liquidity: TOTL maintains strong liquidity since it has cash on hand for longer periods before it needs to settle its liabilities.
Operational Efficiency: A negative CCC often points to efficient operations and strong financial management, as it requires a well-coordinated effort in billing, collections, and vendor management.
Leverage Over Suppliers: The ability to delay payments while receiving money upfront suggests that TOTL has significant leverage over its subcontractors, possibly due to its strong reputation and the Civil Engineering expertise it provides.
The increase in CCC during 2020, at the start of COVID-19, reflects TOTL’s strategic decision to support its subcontractors during a difficult period. This move likely helped in several ways:
Strengthening Relationships: By paying subcontractors earlier during a crisis, TOTL would have solidified its relationships with key partners, ensuring their loyalty and reliability for future projects.
Ensuring Continuity: Supporting subcontractors financially helped ensure they could continue operating, which was crucial for the timely resumption of projects once restrictions were lifted.
Reputation Management: Such actions enhance TOTL’s reputation further as a responsible and supportive main contractor, making it a preferred partner in the industry.
Overall, TOTL’s financial strategies around managing the CCC and its adaptive measures during the COVID-19 pandemic reflect its robust financial health and its commitment to maintaining strong industry relationships. This approach not only aids in weathering economic downturns but also positions TOTL for sustainable long-term success in the construction industry.
Fairness Towards Their Minority Shareholders
So, does TOTL’s management fulfill the three criteria I mentioned above?
Have a good track record.
Are competent in running the business.
Are fair to their minority shareholders (like us!).
I can confidently say that criteria 1 and 2 have already been fulfilled.
This is proven by TOTL's strong financial performance and their significant bargaining power with both customers and sub-contractors.
Now, let’s answer criteria 3: Is TOTL fair to their minority shareholders?
Proving the management's fairness towards their minority shareholders boils down to two words: earnings allocation.
Specifically, after TOTL runs their business, where do the earnings go? Do they:
Distribute dividends?
Reinvest in more resources to grow their future earnings (Capex) ?
Or do they siphon out their earnings to related parties using dubious accounts like trade receivables/payables?
Note: There are quite a few Indonesian public companies that engage in this practice. I discussed this in a previous blog here.
Fortunately for TOTL, number 3 is not the case. This is proven by the fact that TOTL has close to 0% related party transactions. You can verify this by checking TOTL’s audited earnings reports over multiple years.
Number 2 is also not the case. Companies like TOTL do not need large capital expenditures / Capex. All they need to do is maintain their reputation as top-notch construction builders and sustain their bargaining power against their customers and sub-contractors.
TOTL only needs to prepare enough cash buffer to weather economic downturns (like COVID-19) and cover their large fixed costs.
The rest of the money can be distributed as dividends. Is this the case for TOTL? Yes, indeed!
Over the long run, TOTL’s dividend payout has been consistently around 70% of its earnings.
During the COVID-19 period, TOTL reduced its dividend payout to increase their cash buffer during the economic downturn. However, when things returned to normal, they did not hesitate to dramatically increase their payout to reward their shareholders.
From this data, I can safely say that TOTL also fulfills criteria 3: They are fair towards their minority shareholders.
Investment Risks
Int this section, we want to answer the question: “How do you lose money permanently investing in TOTL?”
TOTL’s business is straightforward, and there are only three ways you could permanently lose money (temporary drawdowns not included) investing in this stock:
Premium Risk: Paying too much for TOTL’s business at a premium valuation.
Country Risk: Indonesia as a country disbands.
Ownership & Management Risk: Changes in TOTL’s ownership and management.
Numbers 1 and 2 are quite obvious and do not need further explanation.
For number 3:
At the end of the day, TOTL is inherently a service business, its biggest assets are:
Its brand & reputation
Human capital: The civil engineering expertise of its management & employees
All of TOTL’s advantages I explained above (Negative CCC, favorable payment scheme, etc.) will all be nullified if TOTL’s ownership & management are replaced with non competent people.
Closing Words
Still sticking with us? Wow, you are awesome!
If you think we are biased towards TOTL, you are correct.
TOTL constitutes a significant chunk of our portfolio, and our average purchase price is way below the current market price.
You may ask: “So, are you writing an article just to cherry-pick one success story and show off to the public?” Certainly not.
The purpose of writing this article is to show our thinking framework before we decide whether or not to invest in a particular company.
If you are curious on how our portfolio perform as a whole (not only TOTL), you can always track our performance on our website recompound.id with data updated daily!
Here at Recompound, we do things quite differently:
We think like businessmen and treat stocks as cash-generating businesses, not just some random tickers inside a casino.
It would be difficult to generate long-term outperformance if we use the same strategy that 99% of the market participants use:
Buying a stock just because “it got promoted by a social media influencer with 1 million followers without any comprehensive analysis like we did”
Buying a stock just because hearing their friends “katanya bandar A mau terbangin saham ini nih, ayo ikutan!!!”, got dumped, and conviction on the stock immediately vanished
Buying a stock just because “the price always goes up”
Buying a stock just because “I use their products every day, so the price should always go up”
Buying a stock just because “the price has dropped by 50% from the top, therefore it should be cheap enough to buy.
Panic buy / sell a stock just because there is 1 single good / bad news
Buying a stock solely because it “broke bullish penant” without understanding its fundamentals
Screening for sexy financial ratios (low PER & PBV) on RTI app without understanding its owners, business model, and prospects.
Relying on macro indicators (interest rates, non-farm payrolls, CPI, etc.), which are important but very difficult to predict.
That’s it for today! If you have any questions or comments, please do not hesitate to submit them in the comment section down below. Thank you!