JP Morgan - Astra International: we review rationale and valuations at the point of PT overshoot (Aditya Srinath)

ASII rallied 8% today, breaking beyond our June 2011 Rp55,000 PT. We revisit our thesis and review valuations.

Why a fundamental Overweight? Our thesis is that Astra’s stock performance tracks the vehicle sales cycle. Underlying demand remains strong, and we believe that the vehicle cycle is likely to peak only in 2011, underpinning our positive underlying stance.

What are clients saying: More than one client we spoke to today said that Astra traded at 17-18x FY11E EPS, and they thought that Indonesian consumption plays could sustain valuations of 20x.

Absolute Valuations: Astra trades at 16x FY11E EPS, which seems fair, 12M Forward multiples are in line with 2007 peaks. Relative to Pre-Asian Crisis - Between 1994-mid1997 Astra traded at an average 12x historic PE & peaked at just under 20x.

Relative Valuations: Astra has rerated to a 22% premium to MSCI Indonesia. This is at the upper end of our comfort zone.

Core Business Valuations: We estimate that ex-UNTR & AALI, Astra is trading at a PER of 17.8x FY11E.

Recommendation & Risks: We think valuations are starting to look stretched but outlandish, but could sustain if vehicle sales momentum remains healthy as we expect. We’d prefer not to chase the stock higher, and if the stock retreats we see better buying opportunity. The key risk is that we worry if capacity could constrain EPS growth in FY11, even if demand does not temper as we anticipate. Astra Daihatsu Motor’s expansion (70k units pa) will only be complete by 1QFY11, and we rate Astra’s maximum supply ability in 2011 at about 45k cars per month, which may restrict earnings upside.