Metrodata (MTDL IJ)

Disclaimer: Asian Century Stocks uses information sources believed to be reliable, but their accuracy cannot be guaranteed. The information contained in this publication is not intended to constitute individual investment advice and is not designed to meet your personal financial situation. The opinions expressed in such publications are those of the publisher and are subject to change without notice. You are advised to discuss your investment options with your financial advisers, including whether any investment suits your specific needs. From time to time, I may have positions in the securities covered in the articles on this website. Full disclosure: I do not hold a position in Metrodata at the time of publishing this article. To reiterate, this post and the below presentation are for informational and educational purposes only － not a recommendation to buy or sell shares.

Metrodata (MTDL IJ — US$410 million) is Indonesia’s largest IT distributor.

Notebooks, smartphones, and network equipment all flow through Metrodata’s logistics facilities before they are sold to customers. Almost all global consumer electronics brands sell through Metrodata, giving it a nearly complete product portfolio.

In addition to distribution, the company serves as a system integrator (“digital solutions”): helping design, install and maintain complex hardware and software products from SAP, Workday, Cisco and others. Metrodata works with customers in the financial services, telecom, mining, and other industries to solve any possible IT issues.

These two businesses have helped Metrodata compound its earnings per share at a 22% annual rate over the past two decades. There’s every reason to think that growth will continue, with deferred revenues growing +39% year over year in the first half of 2024.

Distribution may seem like an industry ripe for disruption. But they do seem to serve an essential need, as evidenced by the success of IT distributors in other countries, including TD Synnex (SNX US - US$11 billion) in the United States, Daiwabo (3107 JP - US$1.5 billion) in Japan and Dicker Data (DDR AU - US$935 million) in Australia.

In my view, the business model works because:

• IT distributors offer quick and easy access to the local market for international consumer electronics brands. A company like Dell would have to build costly logistics infrastructure, educate a local sales force, learn to do credit analysis on each customer, deal with returns and warranty claims, and more. By turning fixed costs into variable costs, consumer electronics brands can minimize their own risk.
• With scale, incumbents become hard to beat regarding delivery cost per unit. Large product portfolios also enable them to satisfy the needs of almost any customer, including value-added services such as installation and maintenance of, say, server equipment. The distributors become one-stop shops for solving any IT issues customers might have.

While distribution historically represented most of Metrodata’s profits, that is no longer true. The system integration business is growing rapidly and already makes up half of the operating profit, properly adjusted.

For that reason, Metrodata is more of a bet on cloud services, cyber security, and mobile payments than the sale of IT hardware itself. Within Indonesia, spending on software is growing at a +18% annual rate, and Metrodata sits in the middle of the entire industry.

Today, the stock trades at a P/E multiple of 9x. Now, I will be the first to admit that global distributors all trade at relatively low multiples, with the median at 11x.

However, you could well argue that Metrodata is no longer a pure distributor and should trade closer to the global system integrator or IT consultant peer group’s 20x P/E. So, from a sum-of-the-parts point of view, you’ll get closer to a 16x weighted P/E.

In my mind, the big question is whether cloud services will diminish the role of system integrators. For now, they do not seem to be much of a threat, with partners moving to smaller clients and enjoying recurring maintenance revenues that are on par or better than their old, on-premise contracts.

Another question is why Metrodata’s employee count stopped growing during COVID-19. The hiring still hasn’t picked up. Could it be due to competition from Shopee, which has recently built extensive logistics infrastructure in Indonesia to support its local e-commerce platform?

Finally, some investors worry that generative AI tools could disrupt system integrators. But as far as I can tell, the answer seems to be “no”. In fact, quite the opposite. Metrodata has picked up several AI-related projects, some in cooperation with Vietnam’s FPT Corporation (FPT VN - US$7.4 billion).

In the near term, we should see strong growth in Metrodata’s digital solutions segment as projects continue to ramp up after COVID-19. I also suspect that Metrodata will benefit from Microsoft’s end of support for its Windows 10 operating system in October 2025. It could lead to a new upgrade cycle for its corporate customers.

So the base case, for now, seems to be “more of the same”. In other words, earnings compounding at a steady rate rate with a return on equity of about 20%.

NOTE! This is just a summary of the actual deep dive. To view the full PowerPoint presentation, click the “Download” button below: