Feb 21, 2017 09:45:23

Bank Permata’s FY16 losses are likely to slow group earnings growth. However, higher earnings from Astra’s automotive, agribusiness and heavy equipment units should partially offset the lower income from its financial units. We reduce our FY16F earnings but keep our FY17F forecast, as we expect its financial services arm to recover this year. In 2017, Astra should also benefit from improved consumer spending, as well as higher CPO and coal prices. Our SOP-based TP drops to IDR9,100 (from IDR9,250, 15% upside) implies 19x/16x FY17/18F P/Es. BUY.

  • Unexpected FY16 losses from Bank Permata. PT Bank Permata Tbk (Bank Permata) ($BNLI) – which is 44.6%-owned by Astra – surprisingly recorded a net loss of IDR6.5trn for FY16. This was driven by substantial new provision allocations for non-performing loans (NPL), which significantly increased in 4Q16. In 4Q16, the bank allocated IDR4.3trn in new provisions for allowances for impairment losses, which pressured FY16 earnings.
  • The increase in NPL was driven by loans to the manufacturing, agribusiness, wholesale & retail trading, as well as mining sectors. This year, we expect Bank Permata’s NPL to improve – especially for loans given to the agribusiness and mining sectors. These sectors are benefiting from the current increase in commodity prices, such as CPO, rubber and coal prices.
  • Lower FY16F earnings. Astra’s financial services unit – comprising PT Federal International Finance, PT Toyota Astra Financial Services, PT Astra Sedaya Finance, PT Surya Artha Nusantara Finance and Bank Permata – accounted for 18% of Astra’s 9M16 consolidated earnings. In our calculation, Astra’s financial unit is likely to book a net loss of IDR1.3trn in 4Q16 (from earnings of IDR750bn in 3Q16). Hence, we cut Astra’s FY16F consolidated earnings estimates by 19% to IDR14trn.
  • Tailwinds ahead. We see strong tailwinds for Astra’s mining, agribusiness and auto arms ahead, driven by:
    i. Higher coal prices and slower growth of labour costs for its plantation unit, which may lift earnings;
    ii. Its auto business is likely to maintain strong sales growth, boosted by lower financing costs;
    iii. Hidden value in its property arm (just launched in Oct 2016) which may be unlocked once its assets start to be monetised.

    In addition, in 2017, Bank Permata is likely to book lower new provisions for NPL. The bank’s allowances for its impairment losses coverage ratio increased to 75% at end-Dec 2016 (from 51% at end-Mar 2016).
  • Maintain BUY with a lower SOP-based TP of IDR9,100 (from IDR9,250, 15% upside) that also implies 19x/16x FY17F/FY18F P/Es respectively. While rising NPLs at Bank Permata are a key risk to our call, our sensitivity analysis indicates its impact on Astra’s value should not be significant. (Andrey Wijaya)