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Can Jardine Cycle and Carriage Continue to Outperform?

Jardine Cycle and Carriage Limited (SGX:C07) or Jardine C&C has been an out-performer over the last five plus years. The share price has recorded returns of about 316% from 1 Jan 2009 to the closing price on 7 October 2014. By comparison, the capital gain returns of the SPDR STI ETF (SGX:ES3), a proxy for the Straits Times Index (SGX:^STI), was 74.5% for the same duration. Over the past five financial years, the asset manager paid out a total of about US$5.10 in dividends.

While the returns from Jardine C&C has been zipping along — as Foolish investors, we should look behind the curtains to understand the business drivers for this move in the share price.

A closer look

Jardine C&C graph 1

Source: Company Earnings Report

Majority of the revenue from Jardine C&C actually comes from its 50.1% owned Indonesian unit, PT Astra. For the financial year ended 2013 or FY2013 (The calendar year lines up with the financial year), the Astra business revenue made up 93% of its total sales. It has been the main contributor for the past five financial years.

Jardine C&C graph 2

Source: Company Earnings Report

The profit distribution provides more clues to the contribution of various parts of Jardine C&C. In this case, Astra can be split into six different business segments, namely automotive, financial services, heavy equipment and mining, agribusiness, information technology, and infrastructure, logistics and others.

The main contributor is the automotive segment with 47% of 2013 total profits (before withholding tax deductions). This is segment is mainly concerned with the production, distribution, retail, and after-sales service of cars and motorcycles. The segment drove most of the profit growth in the past five financial years in absolute terms. It counts itself as the largest automotive group in South East Asia.

Next up is the financial services segment which covers consumer financing, and banking and general insurance. This made up 21% of 2013 total profits (before withholding tax deductions). It has been also a strong contributor to profit growth, growing by about 130% in the past five years.

Jardine C&C also has a heavy equipment and mining business segment. This segment supplies construction and mining machinery, as well as being the sole distributor for Komatsu machinery and equipment. It also is the largest coal mining services contract in Indonesia. The Heavy Equipment and Mining segment provided 15% of profits before tax deductions for 2013, and grew close to 120% in the past five years.

The last major profit contributor would be the agribusiness segment which is involved in the cultivation, harvesting and processing of palm oil. This has not done as well as the other segments within Astra, and profits here has shrunk by 38% over the past five years.

In any case, Foolish investors would look for the accumulated profits have to end up on the balance sheet in the end. To do this, we look at the cash and debt development.

Jardine C&C graph 3

Jardine C&C has been in a net-debt position for the past five years. Borrowings has risen strongly from 2009 to 2012, but has come down in the past year. This is certainly an area to keep an eye of to be sure that the borrowings do not go astray. The company, though, generated US$989 million in free-cash-flow for 2013.

A quick look ahead

The company’s 2013 revenue has been affected by the decline in the rupiah. In US dollar terms, it fell 8% compared to the previous year. Chairman Ben Keswick’s outlook for 2014 was that it would also be a year of mixed performances from the different segments. Heightened competition for the Indonesian car market is expected by Astra, alongside rising labour and material costs. Coal prices are also expected to be weak, and may affect the heavy equipment and mining segment. Meanwhile, the company’s concerns around the volatility of the rupiah and interest rates remain.

Foolish Take away

As lifelong students of Foolish long term investing, it pays to look under the hood to understand whether a rise in the company’s share price is supported by the quality of growth that we are looking for.

Jardine C&C appears to have hit a rough patch in its growth currently. The good news is that it still holds a good position in Indonesia in terms of its distribution network of automobiles, and the construction and mining equipment. It’s fortunes may be tied with the health of the Indonesia economy as well so that would be a risk to consider.

As of its close on 7 October 2014 of $41.29, Jardine C&C traded at a price-to-earnings ratio below 13 and has a dividend yield of around 3.3%.  Get more investing news and tips from your FREE subscription to Take Stock Singapore, The Motley Fool’s free investing newsletter.  Click here nowTake Stock Singapore shows how you can GROW your wealth in the years ahead and tells you exactly what’s happening in today’s markets!

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Chin Hui Leong doesn’t own shares in any companies mentioned.