Wednesday, September 25, 2013

I took a position in Tifa Finance

Please read the disclaimer here: Enjoy the article, bitches!

I invested in Tifa Finance about 2 weeks ago at 210 rupiah per share. I invested in the company as it was generating above average returns on capital and trading at an attractive valuation of approximately 5.36 times earnings. The company achieved returns on average assets and average equity of 4.1% and 19.4% respectively in 2012. Tifa Finance activities mainly consists of making finance leases, especially finance leases for heavy equipment which made up approximately 64% of its finance lease receivables portfolio.

Tifa Finance has avoided using too much leverage. The company’s debt to equity ratio of 3.53 is significantly below the maximum debt to equity ratio of 10 that’s allowed by the  Finance Department of Republic of Indonesia. Tifa Finance’s low debt to equity ratio ensures that it will have more room to absorb losses before facing insolvency.

Tifa Finance also seems to have its credit risk under control. Allowance for doubtful debt was approximately 2.67%, 2.25%, 2.57% of finance lease receivables for 2012, 2011 and 2010 respectively. The company’s net interest margin of 8.19% also ensures that the company can set aside a significant amount of provisions to cover unexpected deteriorations in the quality of its finance lease receivables portfolio. Side note: The figures in this paragraph are calculated by myself and may differ from the actual figures that you may get using conventional formulas. However, I’m pretty sure that I did not employ any immoral mathematics (reference to the Swede in Hell on Wheels) and I believe my figures should be close enough. Feel free to send me an e-mail or drop me a comment if you’re interested in how I calculated those figures.

While it can be said that Tifa Finance has substantial concentration risk due to its large holdings of finance leases for heavy equipment. However, a lot of banks also have large concentrations of a specific loan type be it residential property loans, commercial property loans or etc. I don’t look at Tifa Finance’s concentration risk on a standalone basis, but analyse the impact of Tifa Finance on the overall concentration risk of my portfolio. I treat stocks like Tifa Finance as if they were items in a McDonald’s Happy Meal Set. If the cheese burger doesn’t work out, you still have the fries, coke and the toy to fall back on.   

Here’s some immoral mathematics for your enjoyment:

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