May 07, 2016 13:15:28
Astra International: Negative News Likely Priced In
Upgrade Astra to BUY (from Neutral) with higher SOP-based IDR7,400 TP (from IDR6,800, 12% upside) driven by a higher valuation of its agribusiness. Clearer details of its rights issue have been released, which should eliminate its overhang. The accelerated vehicle monthly sales, expected to recover in 2H16, is also a catalyst for its auto earnings. Negative news, such as lower mining contractors’ fee and higher NPLs, have likely been priced in since its share price fell 15% in the last two weeks. It is trading at an attractive -1SD of its 5-year mean forward P/E.
¨ Clearer details of Agri’s rights issue should eliminate its overhang. Since Astra Agro Lestari (Agri) (AALI, BUY, TP: IDR19,500) has disclosed more details of its rights issue – including June 2016 as targeted completion month – we see the overhang on its value to be eliminated. The exercise price of its rights issue should be announced late May, which would be a catalyst for Agri’s share price increase. In addition, we expect Agri to book strong earnings for the current quarter, due to a spike in the domestic CPO price since end-March (average 1Q16 CPO price: IDR6,593/kg vs average price in April: IDR8,630/kg).

¨ Expect better vehicle sales in 2H16. Lower financing costs, as well higher consumer spending should boost both four-wheel (4W) and two-wheel (2W) vehicles sales. New Toyota models – such as the All New Sienta, All New Kijang Innova and All New Fortuner – should increase 4W monthly sales. In addition, finance companies have started lowering their lending rates at end March 2016 – which should provide an additional engine for sales growth. 2W sales growth would be driven by the higher low-end consumer income – which has been boosted by higher CPO price. Notably, last year’s lower YoY 2W sales were attributed to a decline in sales in Kalimantan and Sumatra – where their main income sources are derived from commodities.

¨ Fine tune earnings estimates. Following Astra International’s (Astra) dissapointing 1Q16 earnings, we adjust its FY16-17 earnings estimates to IDR18trn/19trn (-6%/-6%) on the back of lower auto earnings following the implementation of the restructuring of a two-tiered distribution model, effective 1Q16. Our adjustment also includes the lower mining contractors’ earnings impacted by the lower contractors’ fees. We also raise uncollectible receivables (bad-debts) expenses for its financing companies.

¨ Upgrade to BUY, higher TP. We raise our SOP-based TP to IDR7,400 (from IDR6,800), driven by a higher valuation of Agri. We believe that the overhang caused by its rights issue would be eliminated soon. In addition, the accelerated vehicles monthly sales volume would be a catalyst for its auto earnings. Negative news – such as lower mining contractors’ fee and non-performing loans (NPLs) – has likely been priced in since the share price has fallen by c.15% in last two weeks. Astra is now trading at an attractive valuation -1SD of its 5-year average rolling forward P/E. Key risks to our call include weak consumer spending and the depreciating IDR vs USD.