Macquarie ASII Look forward to 2010

Event
We believe that the 12-month outlook for ASII’s operations and share price is now clearer and much improved. Accordingly, we are upgrading to Outperform from Underperform and raising our target price to Rp22,500 from Rp8,400.

Impact
economic recovery to be very positive for ASII. We expect the economy to improve significantly, with GDP growth accelerating, the rupiah appreciating and inflation remaining under control. Our regional economist Bill Belchere came away from a recent visit to Indonesia with the view that the country is likely to emerge from the current economic downturn with farsmaller effects than most Asian economies, with potential upside to our economic outlook due to a stable political environment. Our equity strategist Daniel McCormack advocates being Overweight Indonesia as well as consumer discretionary. ASII allows investors to play both themes.

Valuations are not demanding. On our upgraded numbers, ASII trades at 8.5x FY10E PER, and the implied valuation of the automotive and motorcycle business is 5.6x FY10E PER. We believe that these are cheap valuation levels given the forecast 22% EPS growth for 2010.

Automotive and motorcycle business to stage cyclical recovery in 2010. We expect unit sales to grow by 18–20% next year after declining by an estimated 20–32% in 2009. This is above the consensus. Historically, unit sales have never had two consecutive years of decline and are unlikely to now based on the strong economic growth forecast.

Earnings and target price revision
We raise our 2009E and 2010E EPS by 19% and 27%, respectively. Our EPS forecasts are now 20% above the consensus. Our new TP is Rp22,500, up from Rp8,400.

Price catalyst
12-month price target: Rp22,500 based on a Sum of Parts methodology.
Catalyst: Monthly automotive and motorcycle data points, economic recovery.

Action and recommendation
We upgrade our recommendation on ASII to Outperform with a new target
price of Rp22,500. We believe it is the best proxy for the overall Indonesian
economy, and we are now sufficiently comfortable with the prospects for the
Indonesian economy to once again take a bullish stance on the stock.
We suggest a direct position in ASII for exposure to the cyclical automotive
and motorcycle business, which is trading at only 5.6x FY10E PER. We are
less bullish on its listed subsidiaries, United Tractors and Astra Agro Lestari.
We also recommend that investors switch into ASII from Unilever Indonesia
given the phase of the economic cycle and stock market into which we
are entering.