CLSA Astra Intl (ASII IJ), a Long Way to Recovery

Research Today: Astra Intl (ASII IJ), a long way to recovery
Wilianto looked at Astra International (ASII IJ) FY08 results. Last year was the best year for ASII with all of its major business units recorded strong earning growth. FY08 numbers were also helped by Rp403bn extraordinary gain from Astra Agro Lestari (AALI IJ).

However, earning momentum has turned negative with 4Q08 earnings fall sharply (-30% qoq) and we expect earnings to fall further in 1Q09. Auto business is very volume sensitive and it is worth noting that operating margins dropped sharply in 4Q08 to 1.5% from 4.8% in 3Q08, when Astra’s car sales only dropped by 16% in the quarter. With car and motorcycle sales falling in a faster pace in 1Q09 (pls see the charts below), we expect margins to deteriorate rapidly from here.

Key points from the report:
Astra’s FY08 net profit of Rp9.19tn (+41% yoy) is in line with our expectation, but outlook remains tough. Excluding Rp403bn extraordinary gain from its plantation unit, core profit is 4% better than our forecast.
Last year was the best year of Astra with most of its major business units churn in record high earnings. However, earnings momentum has turned negative with 4Q08 earnings fall sharply (-30% qoq).
We expect earnings to fall further in 1Q09 as car and motorcycle sales only started to fall in late 2008/early 2009. About 46% of Astra’s earnings come from automotive and the proportion rises to around 60% if we includes auto financing and auto insurance.
Recovery path is still distance away given macro headwind is unlikely to reverse in near term. Car and motorcycle sales tend to lag in recovery stage as macro economic picture needs to be better for sometime before confidence return. The recent fall in automotive sales volume is caused by slowing economy which takes more time to recover compared to a downturn caused by tightening monetary policy.
Although Astra will be compelling for long term investor as it has very low solvency risk and will emerge stronger from this crisis, we belie ve it is still too early to jump in. Earnings momentum just started to turn negative and recovery will lag economic growth. We maintain our SELL recommendation.

Maintain SELL, TP Rp9,000.