Jardine Cycle & Carriage

[cyclone]

PT Astra International Tbk 2019 Third Quarter Financial Results

Highlights :
* Net earnings per share down 7% at Rp392
* Motorcycle sales up 5% but car sales down 7%, both with increased market shares
* Higher earnings contribution from financial services and gold mining operations
* Heavy equipment, coal mining and agribusiness activities impacted by lower commodity prices

Prospect
While the Group’s full year result is expected to continue to benefit from an improved performance from financial services and the contribution from the newly acquired gold mine, concerns remain over relatively weak domestic consumption and low commodity prices.

More details in https://links.sgx.com/FileOpen/Astra_201...eID=583809

[gzbkel]

I have been looking at the cashflow of Jardine C&C, and noticed that the adjustment to operating cashflow due to changes in working capital has been negative for 8 years out of the past 9 years.

Adjustment to operating cashflow due to changes in working capital (millions of USD):
FY2019: -1210
FY2018: -496
FY2017: -547
FY2016: -424
FY2015: 12
FY2014: -1102
FY2013: -348
FY2012: -1820

Other companies that I look at tend to have oscillating adjustments due to change in working capital (positive for 1-2 years, followed by negative by 1-2 years, etc). Jardine C&C may be the only case I see that has consistently negative adjustments.

Is there something special about this business that require more and more working capital requirements?
If I take total debtors (current + noncurrent) divided by revenue, the ratio has trended up from 32% in 2012 to about 46% in the last few years.

Normally I would take this as a bad sign of difficulty in getting paid, but just wondering if there is a legitimate reason in the case of Jardine C&C. I admit I am rather new to this company and don't know much about its business other than its a conglomerate operating in SEA, mostly Indonesia. Any insights will be welcomed.

[donmihaihai]

There are finance co. Under astra in Indonesia. The changes in working capital needs is very different for finance/bank and non finance co.

Jardine c & c is a conglomerate that hold interests in more than one conglomerates with wide range of businesses. Its number without meaningful detail eg p&l bs cashflow are actually not a good place to understand the co.

[gzbkel]

Thank you donmihaihai. Taking a closer look, I see financial debtors mixed together with trade debtors, and indeed mixing them together is not very useful.

[DCF]

There are finance co. Under astra in Indonesia. The changes in working capital needs is very different for finance/bank and non finance co.

Jardine c & c is a conglomerate that hold interests in more than one conglomerates with wide range of businesses. Its number without meaningful detail eg p&l bs cashflow are actually not a good place to understand the co.

What will be the good ways to understand and the company?

[donmihaihai]

Read segment results. Read their listed subsidiaries published number. About 10 in Indonesia. One in thai and 2 or 3 in Vietnam.

[karlmarx]

I think it is possible for a fast-growing company to show an increase in working capital every year, regardless of whether it is in the finance or non finance business. I presume the companies on SGX do not exhibit this behaviour because they -- and the Singapore/regional economy -- do not grow as much. Or maybe Astra is more aggressive in expanding.

But I think an investor trying to study JC&C's financials may not learn very much, and may probably do better to just read what they say in their Annual Reports.

Why?

===

JC&C is a large conglomerate with varying ownership of many companies. As such, it should be noted that there is a substantial amount of minority interest in the cashflow statement (and also the P&L and B/S, of course). The actual cashflow to the shareholder will need to be heavily discounted.

This means that we will not know which subsidiaries -- whether the fully owned or partially owned ones -- are contributing cash, and which are taking up cash.

JC&C is a holding company, and its assets look something like this:

JC&C owns 50% of Astra, car dealerships in Asia with varying levels of ownership, and associate-level stakes in some companies like Vinamilk and Siam City Cement.

So most of the results of JC&C will be from Astra, and its car dealerships, with the bulk coming from Astra.

But Astra's results also has a fair amount of minority interests -- which are already included in JC&C -- mostly due to its partial ownership of assets. The listed ones include:

60% of United Tractor (heavy equipment sales, mining contractor, mine owner, construction contractor), 80% of Astra Otoparts (auto parts manufacturer), 80% of Astra Agro Lestari (palm oil plantation), 75% of Astra Graphia (office supplies), and of course, 45% of Bank Permata (but this has recently been sold).

United Tractor also a constituent of the IDX30 index (Astra being one itself). So it isn't a negligible concern.

Astra also has a lot of unlisted companies, with varying levels of ownership.

Refer to page 76 for the complete picture of Astra's assets:

https://www.idx.co.id/Portals/0/StaticDa...t_2018.pdf

===

Since JC&C owns a very diversified portfolio of companies/assets which an investor will have difficulty in understanding each individually -- with the exception of Astra's listed assets -- an investor in Astra might wish to spare themselves the effort and base their decision more on their judgement of the Jardine's integrity and ability to manage/deliver.

Or, an investor can look at whether any of the listed components of JC&C or Astra may be a better candidate than JC&C itself.

[gzbkel]

Hi karlmarx, thank you for sharing your thoughts on this. As usual, it is informative and thought provocating at the same time. There were more big contributors in VB in the past, but sadly many have gone dormant. You are one of the few left. Someone should compile all your long posts and publish as Karlmarx's Art of Investing or something, haha

Indeed Jardine C&C is a really complicated conglomerate and it is going to be hard to analyze.
I thought of adjusting its free cash flow by simply multiplying it by the profit attributable to shareholders divided by total profit, but maybe this is too rough to be useful. As you say, we don't know the free cash flow attributable to each segment (and thus the amount that belongs to minority interest)

I noticed Jardine C&C because it is trading at a historically low PB right now. The price dropped by about 25% from the recent peak of about 36 last July to 26+ now.

Q3 result in Nov shows -9% underlying profit while the latest full year result 2 days back shows a stable result. I am guessing the price correction is due the virus situation. Still the big correction appears overdone, considering Jardine C&C is not in the hospitality business. Could it be fears about secondary impact on commodity prices, or perhaps the Rupiah? I remember Jardine C&C was also badly affected in 2015 due to Rupiah devaluation.

[Bibi]

Q3 result in Nov shows -9% underlying profit while the latest full year result 2 days back shows a stable result. I am guessing the price correction is due the virus situation. Still the big correction appears overdone, considering Jardine C&C is not in the hospitality business. Could it be fears about secondary impact on commodity prices, or perhaps the Rupiah? I remember Jardine C&C was also badly affected in 2015 due to Rupiah devaluation.

The price correction from $30 to $26 is likely due to virus and the statement from its Chairman/CEO after full year results. He mention challenging environment and virus will affect asean countries going into 2020. Also, its full year underlying profit was maintained by reduction in corporate costs. 


From $50 to $30 drop, a number of factors at play. 
1) Persistent low oil prices affecting palm oil prices. Astra palm oil subsidiary started making big losses. 
2) Subsidary THACO profit plunge by 30% due to intense competition when Vietnam opens up competition to foreigners. 
3) Astra motor division dominant market share reduced by competition for past few years. They have to lower prices to keep stamp their market share loss. Similar to Spore C&C motor division.
4) High debt and investors worry it might do a rights issue

[gzbkel]

Hi Bibi, thanks for the summary of all the possible causes! Much things to read up about. With so many companies going cheap at the moment, this may up end on my KIV pile for the time being.