PT Lippo Karawaci Tbk: Value creation in an integrated property company

• Main Author: KOH, Benedict S. K.
• Format: text
• Language: English
• Published: Institutional Knowledge at Singapore Management University 2021
• Subjects: Strategy; Economic Value Added; Value creation; Cost of capital; Return on investment; Real estate development; Finance; Finance and Financial Management; Strategic Management Policy
• Online Access: https://ink.library.smu.edu.sg/cases_coll_all/351; https://cmp.smu.edu.sg/case/4796
• Institution: Singapore Management University

In April 2017, Henry Lubis, an analyst at Megatrends, a global ratings firm, reviewed the analysis he had completed of Lippo Karawaci’s EVA (Economic Value Added). He had come to hear that Johannes Seng, CEO of PT Lippo Karawaci Tbk (Lippo Karawaci), Indonesia’s largest listed property company by revenue and total assets, had emerged from the annual Board of Directors meeting in March 2017 without obtaining an approval to incur capital expenditure of US$100 million (IDR1.34 trillion ) in 2017. The Board of Directors wanted to assess Lippo Karawaci’s shareholder value creation track record, and evaluate whether it was more prudent for the company to focus on growth by expanding its business rapidly through massive capital expenditure, or take measures to achieve a sustainable EVA for its operations. The Board’s concern was that Indonesia’s improving economic growth was not translating into the expected fillip in the property sector, especially in the residential segment. The case provides an overview of the Indonesian property market as of end-2016, Lippo Karawaci’s business profile and consolidated financials, and the market data necessary to compute its EVA and use this metric to assess value creation in its business lines. The recommendation of the company’s strategy, i.e., growth versus consolidation, needs to be based on the appropriate cost of capital that incorporates the cost of debt and equity (as opposed to accounting profit that factors in just the cost of debt). Another consideration is the company’s EVA track record based on reported debt and core equity (i.e. the sum of equity and retained earnings). This case study aims to enable students to understand the distinction between accounting and economic profits; the appropriate inputs for computing EVA – reported shareholders’ equity or core equity; and how a company’s EVA may be used to shape its strategic direction.