Bareksa - We reiterate Buy on ASSA with TP of Rp395 (unchanged), implying 13.2x 2014F P/E. Following strong FY13 results, we have upgraded ASSA 2014-15F earnings by 5% and 16% on lower than expected interest expense.

Operating profit in line, earnings beat estimates. Earnings grew strongly +213% YoY in 2013 at Rp92bn, forming 109% and 112% of our estimate and consensus. Revenue grew +28% YoY while operating profit grew +149% YoY, in line with expectations. ASSA received Rp7bn tax benefit due to 40% free-float. We forecast EPS growth of 10.7% in 2014.

A solid growth of car rental persists. Car rental revenue grew +23% YoY to Rp676bn (66.3% of total revenue), in line with our expectation. Despite headwinds in 2013, ASSA has grown its fleet size by 18% YoY to 12,937 units. This had occurred at the time when the top player in the sector had a 1% decline in its fleet, suggesting that ASSA succeed in maintaining its growth profile. ASSA aims to grow the fleet size by ~17% to 15,100 units in 2014.

Rising contribution from used car and logistics. Revenue from used car sales grew +36% YoY to Rp201bn (19.7% of revenue, from 18.6% in 2012). Logistics revenue grew strongly +45% YoY to Rp 142bn (14.0% of revenue, from 12.3% in 2012), exceeding our expectation.

Easing headwinds going forward. The cost of fund was 10.3% in 2013. We have assumed the rate to increase to 11.5% (2014F) and 12% (2015F). Despite slowdown, auto sales grew +10.2% YoY in 2013. A major car manufacturer has increased average car price by 4% in early 2014. We hear that the heavy discounting has moderated (lower than in 2013).

Undemanding valuation—Reiterate Buy. We have derived our TP based on equal-weighting on 14.0x 2014F P/E and 1.38x 2014F P/BV multiple. Our positive stance due to: 1) Earnings reliability from car rental 2) Benefiting from tighter liquidity as corporate outsourcing 3) Secured profit margin through price increase 4) Undemanding valuation. The stock currently trades at 10.5x 2014F P/E.

FY13 FINANCIAL PERFORMANCE

ASSA booked a strong revenue growth of 28% YoY in FY13. The revenue came in at Rp1.02tr, in line with our expectation and the management guidance. Each business segments have had a significant revenue growth. Interest expense fell by 14% YoY, which brought the gross margin up to 22.6% in 2013. Operating expenses increased by 42% YoY, primarily on salary cost due to minimum wage increase in 1Q13. Operating profit came in line with our and consensus estimates.

Beating earnings estimates on 5% tax benefit in 2013
Earnings grew strongly by 213% YoY and came in at Rp92bn, forming 109% and 112% of our estimate and consensus. ASSA has received 5% additional benefit due to having 40% free-float of shares. The tax benefit has impacted ASSA deferred tax liability from previous years, which brought the total additional tax benefit around Rp7bn in 2013.

Car rental
In line with the fleet growth of 18% YoY in 2013, the car rental revenue grew by 23% YoY to Rp676bn, accounting for 66.3% of ASSA revenue, in line with our expectation. The car rental revenue had grown at 8% QoQ in the 3Q13 and 4Q13.

Used car
Revenue from used car sales grew by 36% YoY to Rp201bn, accounting for 19.7% of 2013 revenue, up from 18.6% in 2012. In 4Q13, the revenue declined by 17% QoQ, as ASSA sold less used cars as compared to previous quarter. In 2013, ASSA sold 1,954 of used cars units with ASP of Rp102.4m per unit and average profit of Rp22m per unit. The ASP was slightly lower than expected (Rp105m/unit).

Logistics
Revenue from Logistics grew strongly by 45% YoY to Rp 142bn, accounting for 14.0% of 2013 revenue, up from 12.3% in 2012, exceeding our expectation. The logistics revenue had grown by 7%QoQ in 3Q13 and 8% in 4Q13.

BUSINESS OUTLOOK

Despite the headwinds (see below) in 2013, ASSA managed to grow its fleet size by 1,968 units (+18% YoY) to 12,937 units. This had occurred when the top player in the sector had a 1% decline in its fleet size. This suggests that ASSA succeed in maintaining its growth profile.

Increasing cost of fund

ASSA business model is capital-intensive one that relies on external financing (bank loan) to keep growing its rental car fleet size. It is known that ASSA business is exposed and sensitive to interest rate changes. When BI increased BI rate by 175bp in 2013 to 7.5%, the negative sentiment weight on the stock. ASSA has now less exposure to rising interest rate as 48% of its bank loan has a fixed rate (vs. 30% fixed at the time of IPO). BI may increase BI rate by 25 to 50bp further in 2014, anticipating the US Federal Reserve outlook to increase the Fed fund rate to 1% by end of 2015 and 2.25% by 2016. BI will also consider other macro indicators such exchange rate and inflation rate (expected to normalize at 5%-6% in 2014). We think BI rate hike is still possible with limited increase in the next 12 months. ASSA cost of fund was 10.3% in 2013. We have assumed the rate to increase, but moderately, to 11.5% (2014) and 12% (2015).

Auto sales slowdown

Based on Gaikindo data, total national 4W volume (wholesale) still grew by 10.2% YoY to 1.23m units in 2013, although slower as compared to that in 2012 (24.8%). For 2014, Gaikindo forecasts a flat volume growth YoY while Frost and Sullivan forecasts a growth of 6.5%. We forecast a moderate growth of 3.3% YoY in 2014.

Heavy Discounting by dealers (moderating)

We heard that a major car player has increased the car prices by 4% on average since early 2014. Furthermore, we also heard that the discount given by dealers in 2014 have moderated (lower) as compared to that in 2013. ASSA reaffirmed that in the past few used car auctions, the used car sales prices are still stable. For instance, Toyota Avanza manufactured in 2010 typically sells with ASP of Rp116m per unit.

FORECAST

We keep our key assumptions and revenue forecast for 2014-15F intact. In 2013, interest expenses came in at Rp116bn (-14% YoY), lower than our estimate of Rp130bn. For 2014-15F, we have lowered our interest expenses to Rp146bn and Rp184bn, based on interest rate of 11.5% and 12%, respectively. These changes have increased our profit margin estimates. Our earnings for 2014-15F have increased by 5% and 15% for 2014-15F. Our 2014F earnings is 4% higher than the consensus, while 2015F earnings is in line.

VALUATION

Using P/E multiple, we value ASSA based on 14.0x 2014F P/E, in line with our stock universe (13.6x 2014F P/E) and have arrived at value of Rp420 per share.

When we value ASSA as multi-finance business, we use our banking sector for comparable (trading at average of 2.5x 2014F P/BV on 2014F ROE of 21%). ASSA has 2014F ROE of 11.6%. Using the banking sector comparable, when we assume the cost of equity and growth are equivalent, we value ASSA at 1.38x 2014F P/BV or equal to Rp375 per share, implying 12.5x 2014F P/E.

Using roughly equal-weighting on both valuation multiples, we have derived our target price at Rp395 per share (unchanged), implying 13.2x 2014 P/E. The stock currently trades at 10.5x 2014F P/E and 1.2x 2014F P/BV.

RECOMMENDATION

We remain positive on ASSA business and reiterate Buy on the stock: - Earnings reliability from car rental segment with high-profile customer baseand longer term contract (1-4 years), accounting for 66% of revenue.
- The rental business to benefit from tighter liquidity as corporate customers outsourcing non-core business functions.
- Secured profit margin as ASSA plans to increase its rental pricing by 5% to 10% to offset the higher cost of fund and higher car price. In addition, the auction center should help improve used car margin by 3% to 5%.
- Undemanding valuation, offering ~23% discount to our stock universe.

*Franky Kumendong is PT Buana Capital's Analyst of Equity Research. This article is part of the Equity Research of PT Buana Capital