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


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.

Valuations remain attractive.

  • 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.

Where We Differ:

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

Potential catalyst:

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

Key Risks to Our View:

  • 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.

WHAT’S NEW - Valuations still attractive

1Q19 results below expectations; absence of Vinamilk’s dividends impacted underlying net profit.

  • 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 led by Singapore and Indonesia.

  • 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.

Guiding for slower growth in non-Astra interests.

  • 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.

Other developments

Ongoing earnings diversification efforts.

  • 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.

Valuation and recommendation

Maintain BUY, Target Price revised to S$39.10.

  • 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