Astra International

I found this stock, Astra International (ASII), when I was doing the routine screening job to find good and undervalue stocks. The name of ASII is certainly familiar to any of you, but I myself had forgotten the last time I hold this stock. However, based on several considerations, ASII at this point might be ideal as an investment choice, especially for those of you who like blue chip stocks with high liquidity.

ASII is the largest conglomerate in Indonesia, with a total of 178 subsidiaries and 191,000 employees as of September 2013. As a conglomerate, ASII engaged in diverse business sectors, namely automotive, financial services, heavy equipments and coal mining, oil palm plantations, information technology, and infrastructure and logistics. The latter may be unfamiliar, but ASII is also has a subsidiary in the field of toll road operators, car rental services, water treatment, fuel terminals, and ports. Until the third quarter of 2013, ASII earned Rp5.6 trillion of revenue from the business of infrastructure and logistics, or greater than Rp1.5 trillion of revenue from the information technology (through Astra Graphia/ASGR).

Here are the details of revenue/income and net profit/net income of ASII until third quarter of 2013 (January – September 2013), based on the type of business, compared to the same period in 2012:

Revenue	Q3 2013	Q3 2012	Growth (%)
Automotive	80,648	76,063	6.0
Financial Services	10,416	9,717	7.2
Heavy Equipments & Coal Mining	37,305	44,137	(15.5)
Oil Palm Plantations	8,324	8,575	(2.9)
Infrastructure & Logistics	5,648	5,498	2.7
Information Technology	1,460	1,301	12.2
Elimination	(1,961)	(2,153)
Total	141,840	143,138	(0.9)
Net Profit	Q3 2013	Q3 2012	Growth (%)
Automotive	7,029	7,384	(4.8)
Financial Services	3,433	2,945	16.6
Heavy Equipments & Coal Mining	3,445	4,499	(23.4)
Oil Palm Plantations	965	1,748	(44.8)
Infrastructure & Logistics	383	515	(25.6)
Information Technology	131	107	22.4
Elimination	-	-
Total	15,386	17,198	(10.5)

Okay, note that the performance of the company was still declining, especially the business of heavy equipments, coal mining, and oil palm plantations. But the business of financial services, including banking and insurance, the growth was still quite good. Interestingly, when compared to the other business units, financial services was also the unit that has the highest profit margin, which is 33.0%, while the overall profit margin of ASII is only 10.8%. It could be said that the business of financial services is that causes the performance of ASII, although down, but still quite good with ROE at the level of 20.8%.

While the other business units, all experienced a tough year during 2013. For the automotive business, the demand for automotive products, both four-wheeled and two were still high due to rising income of Indonesian people, but ASII have to face the increasingly fierce competition, plus the increase in labor costs. For the business of heavy equipment, coal mining, and oil palm plantations, the issue was still the same: The decline in the price of coal and crude palm oil (CPO), which led to a decrease in demand for heavy equipment and reduced profit margins. However, the volume of CPO sales increased significantly, and this means that if the CPO price later rebounded, then ASII should not having difficulties to re-increase its profits from the oil palm plantations business unit.

To address the issue of competition in the automotive business unit, since September 2013 ASII launched Toyota Agya and Daihatsu Ayla, the low cost cars for the medium consumers, which arguably successful in the market. This step is actually copied by one of the main contenders of ASII, namely Indomobil (IMAS), which launched Suzuki Karimun Wagon-R, but other than that there is no serious competitor. For the business units of heavy equipment and coal mining, the company had no corporate action but only wait for the price of coal to be recovered. And for oil palm plantations, ASII through Astra Agro Lestari (AALI) formed a partnership with KL Kepong Plantation Holdings, one of oil palm plantation companies in Malaysia, to establish KLK Pte Ltd in Singapore, to expand the market of palm oil products.

Interestingly, for this year of 2014, ASII is planning to get into the real estate business. The initial step is to acquire a 2.4 hectares of land in Jalan Sudirman, Jakarta, which on the land will be built The Astra Tower, a 47 floors office building, and three apartment towers. Currently the land has been acquired, but the construction are still not begun. In this case ASII cooperate with its related party, Hong Kong Land (HKL), where both ASII and HKL are equally subsidiaries of the Jardine Matheson, a Hong Kong-British investment group.

Okay, then what makes ASII, as I mentioned above, is attractive for investment? Well, it's because some of the following points:

1. ASII is the largest company on the Indonesia Stock Exchange in terms of net assets, and the second largest in terms of market capitalization (behind HM Sampoerna/HMSP). But because the stock of HMSP is lack of liquidity, then ASII is still the largest company in the country. There are many public and institutional investors, both foreign and local, who holds this ASII, and by that if you’re one of ASII’ shareholders, you’re not alone.
2. ASII is a well-established company, having big names, as well as an excellent reputation. Who do not know the name of the Astra Group? There are several major conglomerate group in Indonesia, but it is onlya Astra that has a long history, a track record of good financial and operational performance, and significantly helped the economic growth in Indonesia.
3. The management of ASII is very fair to public investors, where they keep to run the business as it is, and regularly pay dividend in large numbers (about more than a half of its annual net income). The company also never been in trouble with debt or taxes or such, so that the outside of the external factors such as the decline in commodity prices, the management is never really facing serious problems in running the company's operations.

Based on my research, in the early 2000s, ASII was known as an automotive company only, and the business units outside the automotive do not contribute but a little. But in the last five years, there was a booming in commodities, in this case the increasing price of coal and CPO, so the company’s income from heavy equipment, coal mining, and oil palm plantations, all rose significantly. However over time, the commodity prices turned down, or in my language, 'back to normal'. In the past two years, ASII’ revenues from the commodity business were down, but we could say that it is actually just go back to its normal levels, because the year 2010 and 2011 was the golden years for coal and CPO.

Well, of course we do not know will the coal and CPO be booming again. But clearly, in contrast to other coal companies that having issues in paying their debts because the hard situation of the business, ASII did not have such issue, so if later the price recovered, then ASII, or in the case its subsidiaries, United Tractors (UNTR) and AALI, will be the first companies to enjoy the significant growth in its revenue and net income.

And what's interesting of this stock is of course its valuation. When this article was written, ASII was at Rp6,800 per share, and it reflects the PER 15.3 and PBV 2.8 times. Actually, this valuation can not be said to be undervalued, but in its heyday, ASII was at the premium level which its PBV reaches 3 - 4 times, so its curent price is arguably fair. If you can buy the stock at a slightly lower price, let say 6,000 or below, then that's great. As we have discussed above, the high quality of the management of ASII causing the stock has virtually no significant corporate risks, so the only risk is if the Jakarta Composite Index (JCI) dropped, and the stock is dragged down. But as usual, if JCI is actually down and ASII was also down to below 6,000, then it is always an opportunity to buy more at discount prices.

There are many ASII shareholders who already holding this stock since 2009, 2007, 2002, or even longer. And these shareholders are unlikely to sell out their shares only because ASII performance was slowing down, because usually they already have a ‘positive chemistry’ with the company, and also the people in it, so they feel that they have the company as a whole. And that chemistry, frankly, is very difficult to obtain if you are investing in a company of other conglomerate groups in Indonesia, such as Bakrie, Lippo, Sinarmas, or MNC Group.

PT Astra International, Tbk

Rating of Performance in Q3 2013: A

Rating of Stock at 6,800: A