Adi Sarana Armada: Corporate car hire

THE COMPANY: Strong economic fundamentals are lending support to a positive view on Indonesia’s transportation services, specifically the car hire services industry in which Adi Sarana Armada (ASSA) is currently the second-largest player with an estimated 15% market share. The domination of corporate clients in ASSA’s car hire portfolio (98% of the total) provides the company with a shield against economic downturn, as corporate clients are typically more resilient.

Continued credit expansion, rising investments, historically low interest rates and employment growth are providing strong macro support for robust car hire demand in Indonesia. This will increase the number of clients for ASSA. We have conservatively forecast ASSA’s top line to generate 2012-14 revenue at a compound annual growth rate (CAGR) of 32%, translating to 66% earnings per share CAGR over the same period on the company’s deleveraging plan through its recent initial public offering (IPO), lifting its net margin from 1.7% in 2011 to 8% in 2013.

Fleet expansion in 2010-12 of more than 2500 cars per annum not only translates to robust car hire revenue (69% of 2012 total revenue) growth, but also provides substantial future earnings from used car sales (21% of 2012 top line). ASSA, through Galeri Mobil’s car showrooms, engages in the trading of high-quality used cars by wholesalers and retailers, allowing sustainable sales growth, in line with continued strong demand for affordable vehicles in Indonesia. ASSA’s management expects 2012 disposal sales of 1560 cars, rising to 2220-2800 units in 2013-14. Growth will also stem from its logistics business (10% of 2012 revenue), which could further benefit from leveraging off existing customers in its well-established car hire division. Currently, corporate car hire clients, such as Sampoerna and Alfamart, are developing their businesses using ASSA’s logistic services to integrate their vehicle and distribution requirements.

Within the car hire services industry, a high utilisation rate is a determinant of cost effectiveness and higher profitability. ASSA has been able to maintain a high average utilisation rate of 90% since 2007 in spite of a rapidly growing number of hire units to more than 1000 units by the end of 2012 (9807 units in the first half of the year), reflecting 32% CAGR from 2008 to the first half of 2012. This is testimony to the management team members’ average 25 years of experience in the car hire industry.

To ensure sustained future growth, the company’s management will continue to focus on customer services to maintain client satisfaction, which is at the heart of its success in the car hire business. Today, the infrastructure of ASSA’s customer solution centre comprises 15 branches with complete facilities that are supported by nearly 150 staff.

DEVELOPMENT STRATEGY: Going forward, ASSA plans to increase its total fleet, adding an average of 3800 cars per annum. This will help the company to capture a larger market share, in line with management’s growth strategy to expand its business and benefit from demand growth in car hires throughout Indonesia. ASSA plans to repay part of its debt in 2013 due to a high net gearing of above 500%. Thus, debt repayment stemming from IPO proceeds is expected to drive down interest expenses over the course of the year.

FORECAST: Looking ahead, ASSA will have greater flexibility to increase its fleet without risking its financial position by having to borrow more, which in turn will provide ASSA with increased bottom-line growth. Furthermore, operating improvements will come from Rp40bn ($400m) in funding to be used for upgrading its business network and infrastructure development. Additionally, increased working capital should enable the company to provide improved services to clients.

Strong domestic demand, a larger fleet, higher hire capacity and Jakarta’s policy related to limiting the use of private vehicles will all translate to strong top- and bottom-line growth. Given that the car hire sector’s one-year ahead price/earnings to growth (PEG) ratio is 0.6x, ASSA remains attractive with a PEG of 0.3x.