Jardine Cycle & Carriage has added some $1 billion to its market value this past six months and is now among Singapore’s top 15 largest companies by market capitalisation. Closing at $31 last Wednesday, Jardine C&C shares have gained 69% this past year, which makes it the second-best performing stock among the Straits Times Index’s 30 constituents. Only Genting Singapore has done better, rising 77% to $1.14. That hasn’t cooled analysts’ enthusiasm for Jardine C&C, though.
On June 25, Morgan Stanley’s Conrad Werner initiated coverage on the stock with an “overweight” recommendation and a price target of $41. “We believe Jardine C&C is the best way to play the strengths of its key subsidiary, Astra International — strong fundamental growth, solid business track record and experienced management — without the high valuations. Astra International contributes 90% of Jardine C&C’s earnings and 95% of its market value,” Werner wrote in the June 25 note. Werner also initiated coverage on Jakarta-listed Astra International with a “neutral” rating and a price target of IDR49,000.
Astra International, the largest independent automotive group in Southeast Asia, with additional businesses in financial services (Bank Permata, Federal International Finance and Astra Sedaya Finance), agribusiness (Astra Agro Lestari), heavy equipment and mining (United Tractors), IT and infrastructure, mainly sells motorcycles and cars in Indonesia.
At the $41 price target, Jardine C&C would be trading at 13.4 times what Werner calls “base case scenario” FY2010 estimated earnings, which among other things assumes a firm commodity price cycle; average heavy equipment sales volume of 5,204 units; average CPO price of US$800 a tonne for 2010 to 2012 coupled with a 7% compounded annual growth rate (CAGR) in CPO sales volume; a 12% CAGR coal-contracting volume for 2010 to 2012; and CAGR of 10% for motorcycle sales and 16% for car sales at its Indonesian auto unit. It also assumes a gradual interest rate hike for Indonesia and no autorelated taxes in 2012. Jardine C&C has motor units operating in Singapore and Malaysia under the Cycle & Carriage banner as well as other motor interests in Indonesia and Vietnam. The group represents leading automotive marques including Mercedes-Benz, Toyota, Honda and Kia.
In his report, Werner outlines a number of reasons to buy Jardine C&C. Most compelling is the fact that the company’s market value ($11.03 billion) is now about 23% less than the market value of its 50.1% stake in Astra International. To be sure, the market value of its Astra International stake is usually not fully reflected in Jardine C&C’s own share price. But, the discount at which Jardine C&C usually trades is now unusually wide. That might be because Jardine C&C’s Singapore automobile business is about to enter a multi-year downturn, following the restriction of certificates of entitlement (COEs) by the government. Once car sales in Singapore stabilise, Werner expects to see shares in Jardine C&C rebound.
In the meantime, Jardine C&C’s investments in Vietnam’s automobile sector could help buoy its earnings and stock price. “The outlook for Singapore is poor, but Vietnam is a fast-growing market and could contribute up to 10% of Astra International’s earnings in the long term,” Werner says. And, investors will continue to enjoy a dividend advantage by holding Jardine C&C instead of Astra International shares. That’s because investors who invest directly in Astra International have to pay a 15% dividend withholding tax under Indonesian tax laws. Jardine C&C, as its major shareholder, pays only 10% tax and this dividend income is not subject to Singapore’s corporate tax.
There are risks, of course. Jardine C&C is 70%-owned by its parent Jardine Strategic, which leaves it with a relatively small freefloat. “Investors in Jardine C&C shares are minority holders vis-à-vis Jardine Strategic. As it owns over 50% of the outstanding shares, Jardine Strategic can add to its stake without having to make a formal offer for the remaining free float. While Jardine Strategic has not added to its stake since mid-2009, should it do so, the free float would be further reduced and the daily trading volume further impacted,” Morgan Stanley says.
Incidentally, Jardine C&C’s share price is one of the highest in absolute terms among the STI’s 30 members. In fact, shares of Jardine C&C and two others that bear the Jardine name — Jardine Matheson and Jardine Strategic — are the priciest on the STI in absolute terms. Jardine Matheson closed at US$39.34 last Wednesday, while Jardine Strategic closed at US$23.04.
Another risk for Jardine C&C is its car sales in Singapore being hit even harder, as a result of the Land Transport Authority halving the 2010-11 annual allowable motor vehicle population growth rate to 1.5% from 3%, to address what was deemed an oversupply in previous years. For the moment, Morgan Stanley is expecting a recovery in car sales in 2012. Still, Jardine C&C’s motor sales in Singapore and Malaysia only contribute about 7% to its earnings. Some 90% of earnings come from Astra International, where sales are expected to be strong.
“Our proprietary survey shows that Astra International could gain market share in the [four-wheeler] market and achieve stable margins. We also expect strong heavy-equipment and coal contracting volume growth in 60%- owned subsidiary United Tractors,” Morgan Stanley says. The research house also says the market “still underestimates the Indonesian coal industry outlook”, which is driving a major capital-expenditure recovery cycle. United Tractors, the commodities division that gives 20% to 25% of Astra International’s net profit, “could surprise on the upside”, it says.
If that comes to pass, shares in Jardine C&C may well lurch even higher in the months ahead, despite their strong run-up so far this year.