Jardine Cycle & Carriage - DBS Research 2019-04-30: Valuations More Attractive

JARDINE CYCLE & CARRIAGE LTD (SGX:C07)

Jardine Cycle & Carriage - Valuations More Attractive

Jardine Cycle & Carriage’s underlying net profit down 8% y-o-y; adjusting for absence of Vinamilk’s contribution, underlying net profit contracted by 3%.
Direct motor interests’ performance (+6% y-o-y) led by Singapore and Indonesia.
Guiding for slower growth in non-Astra interests, which in our opinion may outpace growth in Astra’s contribution.
Maintain BUY, Target Price lowered to S$39.10.

We like JARDINE CYCLE & CARRIAGE LTD (SGX:C07) for its diversified earnings growth across the region, on top of its strategic 50.1% interest in Astra International. We remain positive on Indonesia’s longer-term outlook, and Jardine Cycle & Carriage represents an inexpensive entry into Astra International.
While we have a HOLD call on Astra International currently given our views that positives have been priced in, we believe that growth from non-Astra interests will continue to outpace growth from Astra’s interests. Jardine Cycle & Carriage’s valuation remains attractive from a sum-of-parts valuation perspective after applying holdco discount.
Moreover, Jardine Cycle & Carriage trades at a c.19% discount to forward PE compared to Astra International, above the 10-year average discount of 15%, even though its NAV discount to its estimated value of holdings has narrowed to c. 17% (around historical mean level) since start of the year.

Our revenue and earnings assumptions in USD differs from consensus possibly due to different FX assumptions.

Potential catalysts include better-than-expected automotive vehicle market share in Indonesia, higher commodity prices to drive its commodities-related businesses.

Jardine Cycle & Carriage is exposed to underlying economic and political risks and business regulations. As Astra contributes close to 80% to Jardine Cycle & Carriage’s underlying profit, Jardine Cycle & Carriage is also affected by commodity prices, competition in Indonesia’s automotive market and interest rates hikes.
Jardine Cycle & Carriage is subjected to USD/IDR volatility as it reports its earnings in USD. We believe that in the short-to-medium term, it is likely that Jardine Cycle & Carriage will potentially raise capital to redeem its debt (FY18: c.US$1.3bn) at the holding company, which may cap the stock’s upside in the meantime.

Jardine Cycle & Carriage’s 1Q19 revenue of US$4.7bn (+2% y-o-y) was largely attributed to higher revenues across Astra’s businesses. However, underlying net profit was down 8% y-o-y to US$201.3m, largely due to the absence of Vinamilk’s dividend income due to timing differences. Excluding this impact, underlying net profit would have been c.US$211m (-3% y-o-y).
Although Astra’s 1Q19 net profit contribution grew 5% y-o-y in local currency terms amid a stronger performance in financial services and United Tractors, the performance from automotive and agribusiness was below expectations. Post translation, Astra contributed US$179.3m (+1% y-o-y) to Jardine Cycle & Carriage’s underlying net profit.

Direct motor interests’ underlying profit grew 6% y-o-y to US$28.1m, primarily led by Singapore and Indonesia’s contribution of US$13.5m (+6% y-o-y) and US$5.5m (+12% y-o-y) respectively.
In Singapore, Jardine Cycle & Carriage continues to maintain its market share of c.21% alongside a growing market while Tunas Ridean recorded higher motorcycle sales but lower motor car sales, as well as higher contribution from its consumer finance operations.
Vietnam’s underlying profit grew 2% y-o-y to US$12m amidst increased completely build-up cars (CBU) competition.

Jardine Cycle & Carriage expects Astra to continue benefitting from the strong performance in United Tractors and financial services, while still seeing intense competition in the automotive market, and weaker commodity prices.
We expect slower growth in non-Astra interests in FY19 after recording 19% y-o-y growth in direct motor interests and 107% y-o-y growth in other strategic interests (due to Vinamilk’s contribution post acquisition) in FY18.
Overall, we continue to expect better growth in non-Astra interests into FY19, compared to Astra-related interests.

On 5 Apr 2019, Jardine Cycle & Carriage announced an increase in shareholding in Thaco to 26.57% (from 25.23%) for c.US$168m through subscription of new shares in a share placement exercise. We believe that such efforts by Jardine Cycle & Carriage continue to demonstrate its ongoing efforts to diversify its earnings away from Astra International.

We have lowered our Target Price S$39.10, derived using sum-of-parts (SOP) methodology, largely on revisions to Astra’s target price (Rp 8,075 TP).
We believe its current valuations are attractive due to its deep NAV discount (current NAV discount of c.16% is near historical average) and higher than historical average PE discount (currently at c.19%) to Astra International.
Jardine Cycle & Carriage also offers a decent dividend yield of c.3%.
We believe there is still upside to Jardine Cycle & Carriage’s current share price per current valuations. We have lowered our FY19F/20F earnings by 7%/5% for FY19F/20F largely from Astra’s earnings revisions.

Rui Wen LIM DBS Group Research | https://www.dbsvickers.com/ 2019-04-30

SGX Stock Analyst Report BUY MAINTAIN BUY 39.10 DOWN 43.100