20150731-Maybank_KERPL-SELL__Uninspiring_Outlook_15页_598kb

Astra International (ASII IJ) Summary

Core Content

Astra International (ASII IJ) is a major Indonesian conglomerate with a diverse range of businesses including automotive, financial services, heavy equipment, agribusiness, and others. The current share price is IDR6,575, with a target price of IDR5,500, indicating a 16% discount. The company's market capitalization is IDR266.2T, and the average daily trading volume is USD12M. Astra is owned by Jardine Cycle & Carriage with a 50.1% stake.

Main Points

• Earnings Outlook: The stock is maintained at a SELL rating with a target price of IDR5,500, reflecting an uninspiring outlook. Earnings for FY15-17F have been revised down by 10.7%, 12%, and 6.3% respectively, due to declining 4W and 2W sales, lower auto margins from intensified competition, and reduced earnings from subsidiaries UNTR and AALI.
• 1H15 Performance: Astra's 2Q15 earnings were IDR4,060b (+2% QoQ), driven by margin improvements in the automotive and heavy equipment divisions. However, the financial services and agribusiness segments saw margin declines. 1H15 total earnings were IDR8,052b, down 18% YoY.
• Auto Sector Challenges: The auto division remains under pressure due to increased competition and a longer product cycle life for Toyota vehicles, which makes rivals more attractive. Astra's 4W market share is expected to decline from 50.8% in 2014 to 45% in 3 to 5 years. 4W sales declined by 3% QoQ, while 2W sales dropped by 5.6% in FY15.
• Financial Services Impact: Auto loan growth is expected to slow, with a rise in NPLs and lower net interest margins. Astra Sedaya Finance (ASF) is projected to grow at 10% per year, while Federal International Finance (FIF) will see a decline in loan growth due to 2W sales performance.
• Heavy Equipment & Mining: Heavy equipment sales have declined due to reduced capex by coal companies. Pama's coal business faces pressure from structural changes in the Chinese economy and low oil prices. The company's margin improvements are attributed to currency depreciation, not operational performance.
• Plantation Sector: Astra Agro's earnings visibility is poor due to falling CPO prices and margin pressure from downstream exporters. The decline in crude oil and soybean prices has negatively impacted CPO prices.
• Key Metrics: Astra's core P/E ratio is ~15x for FY16, which is higher than the JCI's 15x, suggesting a potential discount. The P/BV ratio has declined from 3.2 to 2.1 over the past few years, indicating a drop in book value relative to market price.
• Earnings Revisions: The revised FY15-17F earnings are below consensus by 13.4%, 18.3%, and 17.1%, respectively. These revisions are due to the factors mentioned above.
• Bargaining Power Concerns: The proposed distribution scheme by Toyota Astra Motor (TAM) may weaken ASII's bargaining power with TAM, as sub-dealers will now have direct access to TAM, potentially reducing ASII's control over sales and margins.

Key Information

• Target Price: IDR5,500, which is ~12x FY16 core P/E or a 20% discount to JCI's 15x.
• Earnings Drivers: Automotive (42%), financial services (26%), heavy equipment (25%), agribusiness (4%), and others (1%).
• Market Share Decline: Expected decline in auto market share from 50.8% (4W) and 64.2% (2W) in 2014 to 45% in 3 to 5 years.
• Inventory and Prices: High inventory levels and low prices for best-selling cars due to oversupply in the auto sector.
• Survey Insights: 4W and 2W dealerships are intensifying competition through aggressive sales promotions and discounts, which has impacted sales and margins.
• Financial Services Outlook: Loan growth for ASF is expected to slow, while FIF's growth will also be affected by declining 2W sales.
• Heavy Equipment and Mining: Sales have been declining, and Pama's coal business is under pressure from structural changes and low oil prices.
• Plantation Sector: Poor visibility in earnings due to falling CPO prices and margin pressure.

Summary

Astra International faces a challenging outlook across its key businesses, with the auto sector being the most impacted. The company's earnings have been revised downward due to weak demand, increased competition, and declining margins. The financial services division is also under pressure due to slower loan growth and rising NPLs. Heavy equipment and mining operations are affected by structural changes in the coal industry and low oil prices. The plantation sector is experiencing margin pressure and poor earnings visibility. Despite some margin improvements in certain segments, the overall performance remains weak, and the stock is recommended for a SELL with a target price of IDR5,500.