Monday, September 12, 2005

Cheap pair of wheels?

PT Astra (ASII IJ) Price as at 12 Sept 2005: Rp11,150 (SGD 1.84)

Astra was listed in 1990. It is an Indonesian conglomerate focused on the automotive sector, where it has dominant market share in the domestic car and motorcycle segments. About 56% of its 2004 earnings was contributed by the motor vehicles segment. Other significant earnings contributor is financial services (17%) and agricultural business (palm oil) (11%). With its diverse business, Astra is clearly not easy to value or understand. Over 50% of Astra is held by Singapore listed Jardines C&C. Since acquiring a 39% stake in 2000, Jardines has quietly chalked up its stake. Toyota holds a token 4.8% stake.

Astra's financials are healthy. Over the last 4 years, its ROE is at least 38%. Although financial leverage is fairly high (at 2.4x), the company has gradually reduced its debt over the years. Net profit margin has consistently been at least 10%. Its ROC is a healthy 25% over the last 3 years.

Risks remain. Astra is entering unchartered waters by undertaking a venture into infrastructure projects (power plant and toll road). These projects necessarily requires high capital expenditures and will erode the amount of available cash for dividend payments of an otherwise generous dividend paying company (dividend yield of about 5%). On the flipside, should these ventures pan out, they offer the promise of strong cash flow generation potential.

The Indonesian government has indicated that they would gradually wean the population off fuel subsidies which have kept petrol prices artifically low. This development may translate to less demand for motor vehicles. With rising interest rates, consumers are also less likely to undertake financing to purchase motor vehicles. In fact, Astra's management has reportedly guided that sales are expected to be flat in 2006.

In addition, automobile industries are known to be cyclical, frequently correlated to the health of the general economy. In 1998 during the financial crisis, Astra's sales plunged about 70%. Hence, its sales are likely to suffer if Indonesia slides into a crisis as a result of surging oil prices.

Since 2001, Astra started generating healthy free cash flow. Using a variant of a discounted cash flow model (using assumptions of 5% CF growth in next 10 years, 0% growth subsequently and a hefty 10% discount rate), Astra is estimated to be trading at about 25% discount of my intrinsic valuation estimates. This translates to a target price of Rp14,970.00.

Does the perceived discount of 25% provide sufficient margin of safety to purchase a difficult of understand conglormate with the risks highlighted above? Only time will tell.



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