A growing business
SERA runs a portfolio of growing businesses. The major revenue contributor, the vehicle lease and rental business arm. SERA is also the industry market leader that mainly caters to resilient demand from business entities. The growth is driven by: i) rising business activities in tandem with the nation’s robust growth, and ii) the shifting in preference towards third party vehicle providers from using in-house fleets.
In general, domestic 4W & 2W sales have grown at impressive 12% and 18% compounded annual growth rates (CAGRs) in the past 10 years, while SERA’s 4W lease and rental fleet grew at a 19% CAGR from 2004-2011. As SERA’s second revenue contributor, sales volume in the group’s used car and auction division also revved up by a CAGR of 37% in the past five years since its set up. SERA is also involved in logistics and transportation services.
We believe SERA’s has strong capability to service its debt which comes from 1) asset – liability time matching discipline in which SERA’s debt structure is approximately matching with its lease-rental revenue and used car disposal receipt. 2) the amount of debt taken is mainly based on capital expenditure needed which depends on rental and operating lease demand that ensure cash flow generation to service debts.
In addition, operating lease pricing is also a function of existing interest rate, a flexibility that allows SERA to pass on major part of interest rate expense pressures. 3) SERA’s funding portion which mainly composed of fix interest rate debt (or hedged variable rate debt). Considering lease and rental price also fixed in beginning of contracts, the cash flow is highly predictable. In addition, SERA’s gearing ratio is maintained on the level of 2.6x-4.7x in the last six years with company policy of 6x at maximum.
In the last five years, revenue increased by 34% CAGR. Gross profit and operating profit was also growing along by 29% and 32% CAGR in the same period, while net profit grew by 66% CAGR. The solid growth is driven by growing existing business and installment of new business.
Astra International sole ownership
We like the fact of the full ownership by Astra International as it indicates strong advantages on 1) good corporate governance practices, 2) solid brand images, and 3) synergies from automotive business value chain.
Generally, we classify SERA’s main business into four segments 1) car and motorcycle operating lease and rental which is supported by driver services, 2) used car trading and auction service operation, 3) logistics which include shipping, forwarding, and warehouse management, and 4) taxi operation.
The figures below show the 2011 revenue and gross income contribution from each segment. We see that car and motorcycle rental and operating lease still dominate the revenue, while in the net profit, lease-rental still the major contributor. Within the operating lease and rental segment itself, the leasing to corporate entities dominates the business activities as only minor numbers of car is used to serve daily rental.
Founded in 1986 as PT. Sinar Inti Telaga, SERA optimized its advantage as part of Astra group by starting to use “Toyota Rent a Car “trading brand since 1990. In 2001, the company rebranding itself into the “TRAC – Astra Rent A Car” brand which is currently widely known. The Toyota, then Astra brand provides strong recognition in automotive business excellences. In addition, SERA started to include the driver services in 2003 whilst the motorcycle operating lease and rental in 2004.
From the point of view of the bondholders, the Company’s sole ownership by Astra International is a hallmark of good corporate governance, giving assurance of highest intention to fulfill the coupon and principal payment.
Along with the growing operating lease and rental business, SERA capitalized its role within Astra value chain by installing the used car and auction services in 2006-2007 and the logistics business in 2007-2011. SERA also added taxi operation in 2005. We emphasizes the importance of used car and auction services for its strong positioning in 1) Astra value chain; used car and auction services support Astra new car sales by providing the easy channel for a used car owner with limited funding who needs to sell his car first before purchasing the new one.
In other side, the business itself benefited by receiving streaming supply of used car from the typical customer above. This kind of synergy optimizes the wide dealer distribution network provided by Astra group, 2) Higher margin for SERA used car resale. As an operating lease and rental company, SERA itself provides continuous supply of used car. Having its own used car and auction services, SERA enjoys additional margin from its used car resale which previously given to used car traders. Logistic services also have a vital place in Astra value chain as it serves Astra growing main business in automotive, heavy equipment, and plantation transportation and distribution.
SERA is led by group of directors with years of experiences within Astra group that ensure strong competences within the business and implementation of Astra core value.
1. Pongki Pamungkas (President director)
President director since 2005, currently also serves as commissioner in Marga Mandala Sakti (2009-today) and president commissioners in Harmoni Mitra Utama (2008-today). He previously worked as director in Astra Agro Lestari (2000-2005), Deputy Chief Astra International (1998), Director in Putra Serasi Pionerindo (1996-1997) and Deputy Director in Astra Agro Niaga (1995-1996). Graduated from Brawijaya University in 1983. Born in 1956.
2. Edy Gunawan (Director)
Director since 2008, currently also serves as commissioners in Serasi Mitra Mobil (2010-today), director in Harmoni Mitra Utama (2008-today), director in Toyofuji Serasi Indonesia (2005-today), and director in Toyofuji Logistik Indonesia (2005- today). Previously marketing manager in TRAC (2001-2006). Graduated from 17 Agustus University, Surabaya. Born in 1968.
3. Jefri Rudyanto Sirait (Director)
Director since April 2011. Previously worked as General Manager in TRAC (2009-2011), Corporate Asset Management Division Head (2007-2009), General Manager in truck division and TREMO (2006-2007), and Corporate Fleet Division Head (2004-2011). Graduated from IPB in 1989. Born in 1966.
4. Kumaguru Nadaysen (Director)
Director since 2012. Previously worked as Commissioner in Kalimantan Prima Persada (2010-2012), Director in Pama Persada (2008-2012), and Commissioner in Pama Indomining (2008-2012). Graduated from University of Canterbury in 1994. Born in 1961.
Operating lease and rental business
As already pinpointed, we believe strong economy growth and higher business activities are driving up the needs of vehicles as shown in domestic new car sales. In addition, along with the development of economy, business entities tend to be more focused in their core activities which in turn will increase demand for outsourcing in the non core activities, including supporting transportation management and vehicle procurement in general and operating lease and rental in specifics.
We like the SERA current positioning as we believe it place SERA as one of the higher benefactor of growing demand in car and motorcycles operating lease and rental demand, considering it possess several characteristics:
1) Leader in the industry; with 30,979 cars in operation, SERA is the largest integrated operating lease and rental services in Indonesia. Its closest competitors are Assa Rent (part of Adira Multifinance), Tunas Rental (parts of Tunas Ridean,) and Indorent (part of Indomobil). As the industry leader, SERA is the price setter, an advantage that will supports SERA’s long term margin. SERA operates 34 branches and 68 rental outlets throughout Indonesia.
2) SERA focuses on premium market segmentation with concentration on service quality; another trait that also support the high margin. Customers within this category usually have strong financial performance which will lower risk of contract discontinuation or cancelation. One major example for the high quality services is the transportation management system in which SERA manages the transportation needs fulfillment for the clients.
3) Well diversified clients. SERA serves more than 3000 customers, both from Astra group and from non Astra group. Clients including top industry performers such as United Tractors, Astra Agro Lestari, Bank Permata, FIF, Astra International – TSO, and Pama Persada (from within Astra group) and also HM Sampoerna Group, Bentoel Prima, Bank Central Asia, Sumber Alfaria Trijaya, Telekomunikasi Selular, and Thiess Contractor Indonesia (from outside Astra group).
SERA’s contracts averagely run for four years. As we will discuss in the asset – liabilities section, funding usually structured in the same terms to match cash inflow with approximately around 55% payment occurred in the fourth years, thus the discipline to resale the used car in fourth years becomes critical.
Used car trading and auction services
The used car is coming from external parties, Astra groups, and from SERA’s operating lease and rental division. We expect activities in used car trading to grow in the same trend with the domestic market sales, however the magnitude may be differed. We expect a volume growth of 20% CAGR and 25% CAGR in 2011-2016 for both of SERA’s used car trading and auction services respectively.
Provides shipping, forwarding, and warehouse management which partly serve Astra groups including Astra automotive business groups, United Tractors, and Astra Agro Lestari. Figures below show Astra brands domestic car sales, United Tractors’ Komatsu sales, and Astra Agro’s CPO sales which serve as the underlying driver of logistics segments demand.
Please take notes that Toyofuji Serasi Indonesia that serves Astra brands distribution is only 40% owned since the end of 2009. Thus the income will be included in income from jointly controlled entity. Among the business line, the Serasi Logistik Indonesia is serving third party outside Astra groups.
SERA taxi operation is currently only serving for Surabaya and surroundings area. We expect SERA to start expanding into other Java-Bali main cities except for Jakarta in the next five years as the business model is already proven in Surabaya.
1. Deteriorating economic condition. In the condition of deteriorating economic environment, business activities will be lessen which in turn will reduce demand of vehicle operating lease, rental, and logistics in specific and other business line in general..
2. Fluctuation in interest rate. In general, interest rate hike will increase the operating lease and rental fee which may reduce demand. Another direct impact comes from higher interest expense from an unhedged portion of variable rate debt, however the impact is limited as 95.4% of its long term debt comprised of fixed and hedged rates.
3. Business risk. Increasing competition, changing preferences to use more own fleet, and other factors which may lead to discontinuation of contract may lower revenue and lower performance.
Asset liabilities management
The key strength of SERA ability to pay its debt obligations lies. Within its discipline to match debt structure with its operating cash inflow. When drawing a new long term debt. SERA usually follows a pattern of low amount of maturity in the first three years. A large bullet payment in the fourth year which match the pattern of cash inflow from leasing fee and used vehicle resale.
The second factor that reduces the risk of default is that SERA’s nature of pricing policy. That is calculate based on: current new car price, interest rate, maintenances, insurance, and overheads. Considering SERA only draw new debt to fund expansion that already have captive demand. We may expect the income stream will always be sufficient to service mature debt. Interest expense as long as the customers doesn’t canceled the contract in a large extent.
However as already stated above, SERA’s customers base is highly diversify. Within the premium segment which generally have strong financial performance. In the highly unlikely case of large contract cancelation from customers. SERA receive the cancelation fee and still possess the use car. That could be use for other projects or resold. With higher value compare to the car that is resold after normal four years contracts.
The third step. SERA took to manage its risk is by mainly using fix rate. Its long term debt or to hedge its variable rate debt. In proportion wise, the total fixed and hedged rate compromise of 95.4% of the long term debt.
The company historically keep debt equity ratio at 2.6x-4.7x in the last six years. We expect the DER to slowly moderate after topped at 4.7x in the last year. The DER is still below 6x threshold impos by company internal policy. Figures below shows that net gearing and liability to equity ratio approximately move in the same trend. Since 2008, SERA maintained interest expense coverage above 2.0x. We expect the interest expense coverage to be above 1.5 in the following five years.
Under the assumptions stated above, we expect the company top lines to grow by 24% CAGR in 2012-2016. Slightly moderating from the high CAGR of 34% in 2007-2011. In tandem, we also expect gross profit and operating profit to increase by 22% and 25% CAGR. Each respectively, in 2012-2016. In term of consolidated margin. We expect the gross profit margin to be slightly lower, to 23.5% in average for 2012-2016. Compared to 26.0% in 2006-2011 as we expect larger portion of revenue coming from used car and auction service segment.
However we expect decreasing operating expense as percentage of sales as a result of higher economic of scale. Profitability has been jump up in 2008 and onward. Driven by improvement in business condition and larger gain on SERA own car resale. All in all, we expect net income to grow by 24% CAGR in 2012-2016. We also expect ROE to be range at 29.2-35.4% in the following five years. Historically, ROE have been around 30% since 2008. Dividend payout ratio is likely to be maintain at 40% in the following year. The same rate with the past three years.