Jardine Cycle & Carriage: Systemic motorcar sales continue to decline despite interest rate cuts

Motorcar sales fall in May. Preliminary data indicates that new motorcar unit sales in Indonesia declined 34% YoY in May (or -6.1% MoM), to 32,500 units. This was despite the central bank cutting key interest rates by a further 25 basis points in May to 7.25%. The data seems to reaffirm our earlier view that consumers are still cautious and are not spending on automotives. Maintain SELL on JC&C, with price target of S$11.50.

4M09 market share of 57% likely to remain consistent. We are expecting domestic motorcar unit sales in FY09 to decline 25% after the strong sales achieved in FY08. This is expected to be dragged down by the global economic slowdown. We expect Astra to achieve a market share of 56% for motorcar unit sales in FY09, given its consistent performance in the first four months of the year.

Further interest rate cuts may not spur demand. Indonesia cut its benchmark interest rates by yet another 25 basis points in Jun 09 (the seventh consecutive month) to 7.0% and maintains that there is still room for further reductions as the nation’s inflation slows. We maintain our view that demand for automotives are not likely to surge even if interest rates continue to decline, due to protracted global economic downturn.

Maintain SELL. We are maintaining our estimates of a 22% and 20% decline in Astra’s FY09 motorcar and motorcycle unit sales respectively. Based on SOTP valuation, we have a target price of S$11.50.

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Jardine Cycle & Carriage: Motorcar sales

Motorcar unit sales decline. Even though Apr domestic unit car sales in Indonesia grew 1.4% MoM, we note that on a YoY basis, sales declined from 51,642 units to 34,611 units (-33%). even as the central bank lowered its benchmark interest rates by 25 bps to 7.5% in Apr. Astra’s market share was slightly lower in Apr at 55%, compared with 59% in Mar. The pace of decline may have stabilised, but unit sales are not expected to pick up significantly to make up for the earlier decline.

Room to cut interest rates further. There is an expectation that Indonesia’s central bank may cut its interest rates further on the back of lower inflation. The key interest rate now stands at 7.25% in May. However, we do not think it will lead to surge in demand for automotives because consumers are still holding back their spending, given the global economic slowdown. On top of that, commercial banks are not lowering their lending rates much, despite the aggressive cuts in Jan-Apr 09 CPO production lower. For the 4M09, Astra’s CPO production was 304,893 tons, 6.5% lower compared with the same period in 2008. This was attributed to lower fruit yield. Yields are likely to remain low in 2Q09, but could improve in 2H09 as trees recover from drought-induced stress.

Average CPO price assumption raised to Rp5,683/kg (RM1,900/tonne) (previously Rp4,935/kg or RM1,650/tonne), in view of the run-up in CPO prices YTD. As a result, our earnings estimate for FY09 has been revised upwards to US$343.7m (US$333.2m previously). Raise target price to S$11.50, from S$10.28. Our target price for JC&C is based on a SOTP valuation, using blended FY09/10 earnings. Maintain SELL.

Jardine Cycle & Carriage: Slowdown across key businesses

1Q09 net profit fell 31% YoY to US$88.2m, in line with our forecasts.Revenue declined 23% YoY, as key business segments reported a slowdown.Business activity across all its business segments are expected to be weak,as the global economic recession continues, and we expect FY09 earnings tobe lower YoY. Slowing inflation in Indonesia and potential interest ratescuts could help to slow down the decline in automotive unit sales, but wedo not expect a growth in FY09 automotive unit sales, given the weakeningeconomy. Our target price of S$10.28 is a 22% downside from current price,and with FY09F dividend yield of 3.0%, the stock is not attractive. Wemaintain our SELL recommendation.

Lower CPO prices dragged down agribusiness earnings. During the quarter,CPO prices achieved fell 32% YoY, resulting in a 79% YoY drop in net profitcontribution from the agribusiness.

Weaker demand for automotives leads to lower profit contribution. Theweaker economy and soft commodity prices resulted in lower demand forautomotives, especially motorcycles. As a result, net profit contributionfrom automotives declined 28% YoY.

Increased coal mining activities helped boost profit contribution.There wasimproved profit contribution (+26% YoY) from the heavy equipment business,driven by increased mining.

Maintain earnings estimate of US$333.2m for FY09. We have a target price ofS$10.28, based on SOTP valuation. Maintain SELL.