A growing business
Domestic 4W & 2W sales book an impressive 11% and 19% compound annual growth rate (CAGR) in the past nine years, spurred by long term Indonesia’s growing economy. Along with the increasing needs of vehicles, operating lease and rental demand also have been increasing. In addition, particular segments of business entities are also shifting towards rental & operating lease from previously using in-house fleet.
Considering its position as industry leader, SERA is directly benefit from this positive trend. That is shown by SERA’s 19% CAGR in its 4W lease and rental fleet in 2004-2009. In tandem, SERA’s second business, used car and auction division sales volumes also enjoy 38% CAGR. in the past four years since its installments. SERA also involves in logistic services and taxi operation.
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 need 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 compose of fix interest rate debt (or hedge 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 maintain on the level of 2.6x-3.5x in the last five years with company policy of 6x at maximum.
In the last four years, revenue increase by 33% CAGR. Gross profit and operating profit was also growing along by 27% and 31% CAGR in the same period. While net profit impressively grew by 84% CAGR. The solid growth is mainly driven by 1) growing rental and operating lease business activity, 2) the installment and growth of use car and auction services, 3) increasing gain from vehicle resale, 4) operating efficiency on larger economic of scale and 5) decreasing cost of fund environment.
Astra International sole ownership
The full ownership by Astra International 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 support by driver services, 2) use car trading and auction service operation, 3) logistics which include shipping, forwarding, and warehouse management, and 4) taxi operation. The figures below show the 2010 revenue and gross income contribution from each segment.
We see that car and motorcycle rental and operating lease still dominate the revenue, however in term of net profit, the major contribution is still derive from the car and motorcycle rental and operating lease. Within the operating lease and rental segment itself, the leasing to corporate entities dominates the business activities as from 25,093 cars in operation, only 1,100 is use to serve daily rental.
Found in 1986 as 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 decision was made to widen its vehicle array beyond Toyota brands. The Toyota, then Astra brand provides strong recognition in automotive business excellences. In addition, SERA start 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 capitalize its role within Astra value chain by installing the use car and auction services in 2006-2007 and the logistics business in 2007-2010. SERA also add taxi operation in 2005. We emphasizes the importance of use car and auction services for its strong positioning in 1) Astra value chain; use car and auction services support Astra new car sales by providing the easy channel for a use car owner with limited funding who needs to sell his car first before purchasing the new one. In other side, the business itself benefit by receiving streaming supply of use car from the typical customer above. This kind of synergy optimizes the wide dealer distribution network provide by Astra group, 2) Higher margin for SERA use car resale.
As an operating lease and rental company, SERA itself provides continuous supply of use car. Having its own use car and auction services, SERA enjoys additional margin from its use car resale which previously given to use 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. Pongky 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 work 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. Nico Tahir (Director)
Director since 2005, currently also serves as director in Astratel Nusantara (2010-today), vice president director Gresik Distribution Terminal (2009-today), and commissioners in Marga Mandala Sakti (2009-today). He previously work as head of corporate treasury in Astra International (2002-2006). Graduated from Tarumanegara University in 1994. Born in 1969.
3. Edi 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.
4. Jefri Rudyanto Sirait (Director)
Director since April 2011. Previously work as General Manager in TRAC (2009-2011), Corporate Asset Management Division Head (2007-2009), General Manager in truck division and TREMO (2006-2007), Corporate Fleet Division Head (2004-2011). Graduated from IPB in 1989. Born in 1966.
Operating lease and rental business
As already pinpoint, 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 focus 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 25,093 cars in operation, SERA is the largest integrate operating lease and rental services in Indonesia. Its closest competitors are Assa Rent (part of Adira Multifinance; operates 7,000 unit), Tunas Rental (parts of Tunas Ridean, operates 3,900 unit) 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 33 branches and 53 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 diversify clients. In 2010, SERA serve 3,000 customers, both from Astra group and from non Astra group. The customer base is quite diversify with top 20 customer only accounts for 37% of total revenue. In total, Astra group only accounts for 14.6% from revenues and in top 20, Astra group only accounts for 10% of the revenue. 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).
We believe there is a vast opportunity to be explore from both existing clients and new potential markets. Currently SERA is trying to penetrate the mining industry in Kalimantan which is usually avoid by other industry players.
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 use car in fourth years becomes critical. Besides the timing, the gain incurred also plays substantial contribution to the consolidate gross margin as we will see in the financial performance section, as gain/ unit increase substantially in 2008, so did SERA’s performance.
Use car trading and auction services
The use 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 17% CAGR in 2011-2015 for both of SERA’s used car trading and auction services.
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 include in income from jointly controll 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 unhedge portion of variable rate debt, however the impact is limited as 79% of its long term debt comprised of fixed and hedge 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.
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 and interest expense. As long as the customers doesn’t cancel the contract in a large extent.
However as already stated above, SERA’s customers base is highly diversified within the premium segment. 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 used car that could be used for other projects. Resold with higher value compared to the car that is resold after normal four years contracts. The table below shows the matching of operating cash inflow and payment of long term debt within 2008-2010.
The third step, SERA took to manage its risk is by mainly using fix rate. The fix rate for its long term debt or to hedge its variable rate debt. SERA’s portion of fix rate and hedged variable rate long term debt by 2010 is at ~79%. Special notes for the short term debt from Astra International which is quite substantial at IDR1.2trn (end of 2010). We have been told by the management that SERA already paid part of the debt. As SERA received syndicated loan in the early 2011. The remaining balance was IDR650bn per 18 May 2011 which we expect to be paid within this year. The new syndicated loan is in variable rate, however SERA immediately hedged it into fix rate in each drawing.
The company historically keep debt equity ratio at 2.6x-3.5x in the last five years. We expect the DER to be topped at 3.9x in 2011. Before slowly going down to 2.8x in the following years. The DER is still far below 6x threshold imposed 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 condition to be the more or less maintained in the following five years.
Under the assumptions stated above, we expect the company top lines to grow by 22% CAGR in 2011-2015. Slightly moderating from the high CAGR of 33% in 2007-2010. In tandem, we also expect gross profit and operating profit to increase by 20% and 21%. CAGR each respectively in 2011-2015. In term of consolidated margin. We expect the gross profit margin to be slightly lower to 22.4% in average for 2011-2015. That is compared to 26.1% in 2006-2010. 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 jumped 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 22% CAGR in 2011-2015. We also expect ROE to be range at 29.2-36.2% 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.