Astra International - Not that sensitive to inflation

(dated 5 Januari 2011)
Inflationary pressure has a mixed impact to Astra. Rising commodity prices will benefit 30% of the company’s earnings. Financial services might see volume and margin squeeze; however we think the risk of a massive drop in loan growth and margin such as in 2006 is low.
Motorcycle sales are more sensitive to tightening lending, however rising rural income will partly offset the impact. We view Astra’s current weakness as a buying opportunity. It now trades at 14x PE11.
Commodity-related businesses serve as inflation-hedge ~30% of earnings are commodity-related, which comes from United Tractors (UNTR IJ) and Astra Agro (AALI IJ). This will benefit in an inflationary environment driven by higher commodity prices. We think there is upside to our forecast of 8-10% growth in UNTR heavy equipment sales, and mining contracting business. Also, CPO price has hit US$1,200/t (our FY11 estimate is US$1,000/t). For every 5% rise in price will boost AALI’s earnings by 9%.
Financial services might see volume and margin squeeze The remaining 70% of earnings is interest-rate sensitive, with 50% from auto-related sales, and 20% from financial services. In a high inflationary environment, the financing arms might see lower loan growth and potential margin squeeze given its more debt sensitive nature (the need for low cost fund). However we think this time the impact will be less severe than in 2006 where total multi-finance lending in Indo declined by 13% as the nationwide lifting of fuel subsidy was implemented in 2005.
Tightening lending but rising rural income to offset drop in sales 80% of motorcycle purchases are through financing, while only 60% for cars due to different market segment. However, rising income from commodityrich areas will partly offset the negative impact (50% of bikes sales are ex-Java, while only 33% of car sales are ex-Java). We also believe that theimpact from the ban on subsidized fuel purchase will not result in a massive blow to inflation given its staggered roll-out, exemption on bikes and public transport, and difficult implementation. Moreover, car penetration is still low.
Short-term weakness as a buying opportunity While we keep a cautious watch on the stock, we still view the current weakness as a buying opportunity. Astra remains a market proxy given its strong presence in major sectors, good governance and healthy balance sheet. Astra is now trading at 14x PE11. BUY. ( 12M price target Rp64,000 )