ASII Downgrade to Sell – slower growth and lower returns through 2012 - Goldman Sachs

Source of opportunity
We downgrade Astra International (ASII) to Sell from Neutral, as we expect rising interest rates, higher auto taxes, supply constraints from the Japan earthquake and higher cost pressures to negatively impact 2011-12E auto sales/profits. We lower our auto earnings to 7-11% below consensus but raise estimates for ASII’s commodity divisions, driven by our stronger commodity price outlook. Hence our 2011E-201E EPS (3% below consensus) changes by (0.7)-4.3%. However, our SOTP-based TP falls 7.5% as we traditionally assign a higher target multiple to ASII’s auto division than to its other divisions. With this note, we transfer primary coverage from David Ng to Miang Chuen Koh.

Catalyst
1) Policy rate hikes in Indonesia; 2) Decelerating auto sales momentum; 3) Potential removal of fuel subsidy for 4W; 4) Weaker quarterly auto margins; and 5) Potential pull-back in CPO / coal prices.

Valuation
We value ASII based on SOTP given its conglomerate model but do not apply a conglomerate discount, as ASII has not historically traded at a discount to its
SOTP. Our new Rp49,000 TP (from Rp53,000) implies P/E / P/B of 13X / 3.4X – still at the high end of its historical range but more reasonable, in our view.

Key risks
(1) Lower-than-expected inflation; (2) Lower-than-expected competition (3) Weak / non-implementation of new auto rules / regulations; (4) Strongerthan-expected non-auto business; and (5) Milder-than-expected supply impact from Japan earthquake.

Impact on related securities
In a separate note, we lower our TP for ASII’s parent company Jardine Cycle and Carriage (JCC). However, as JCC has significantly underperformed ASII recently, we see limited downside and remain Neutral on the stock.