Mar 18, 2016 20:22:01
Astra International ($ASII): Expect Overhang On Agribusiness’ Rights Issuance

We downgrade our call to NEUTRAL (from Buy) on Astra International as there could likely be an overhang on Astra’s subsidiary Astra Agro’s share price during its rights issuance process, which might be completed in early 2017. We cut our earnings estimates on the back of lower CPO sales volume and higher plantation costs. We also trim our SOP-based TP to IDR6,800 (from IDR7,300, 6% downside), implying 14-13x FY16F-17F P/Es. Meanwhile, wholesales of vehicles improved MoM in February, but it was still slightly below expectations.

¨ A likely overhang on Astra Agro Lestari (Astra Agro) ($AALI). We think that the rights issuance of Astra International’s (Astra) agribusiness arm may create an overhang on Astra Agro Lestari’s share price until it is completed – which is likely to be early next year. All rights issuance proceeds would be used to settle its existing low-interest debts which, given the cost of equity being more expensive than its cost of debts, would increase Astra Agro’s weighted average cost of capital (WACC).

¨ Despite a MoM improvement, February sales were below estimates. Astra’s vehicles sales improved MoM in February. Four-wheel (4W) vehicle wholesales increased to 41,500 units (+4.6% MoM), while two-wheels (2W) vehicle wholesales rose to 362,200 units (+25.9% MoM). However, it was slightly lower than our expectations, in which 2M16 sales were merely around 14% of our full-year estimate. On a YoY basis, both Astra 4W and 2W vehicles wholesales declined, in addition to the fact that the company is losing its 4W vehicle market share due to rising competition, especially from Honda, which aggresively launched attractive new models. For 2W vehicles, Astra’s market share increased to 68.5% (from 67.7% in 2M15) – which is in line with our expectation.

¨ Paring down earnings estimates and TP. We cut our FY16F/FY17F earnings for Astra to IDR19trn/IDR23trn (-4%/-11%) respectively, driven by lower earnings estimates on its agribusiness. We also cut our agribusiness earnings estimates on the back of lower CPO sales volume, as well as a higher plantation cost per hectare. We trim our SOP-based TP to IDR6,800 (from IDR7,300) – which implies a 6% downside – driven by the de-rating on the valuation of Astra’s agribusiness.

¨ Key risks to our views include: i) a relaxation in the loan-to-value (LTV) requirement for auto financing, ii) a faster-than-expected interest rate reduction, iii) faster-than-expected recovery in the prices of CPO and coal, and iv) faster realisation on infrastructure spending.