Earnings Fall At Jardine Cycle & Carriage Limited – But That’s Okay

Jardine Cycle & Carriage Limited (SGX: C07) released its third quarter earnings yesterday evening.

Before I get down to interpreting the numbers and what it means for the company’s long-term outlook, you would first have to know that the majority (more than 90%, in fact) of Jardine Cycle & Carriage’s top- and bottom-line comes from its 50% ownership of Indonesia-listed conglomerate, Astra. The remaining portion of Jardine Cycle & Carriage’s revenue and earnings stream comes from its “Other Motor Interests” segment.

You’d understand why the word “conglomerate” is used to describe Astra when you take a look at the business segments it has: Automotive; Financial Services; Heavy Equipment and Mining; Agribusiness; Infrastructure, Logistics and Others; and Information Technology.

The financial highlights

Coming back to Jardine Cycle & Carriage’s third quarter earnings, here’s a quick run-down of the important figures for the nine months ended 30 September 2014:

  1. Revenue’s down 6% year-on-year to US$14.1 billion;
  2. Profit’s down 4% to US$646 million;
  3. Underlying profit has slipped by 6% to US$628 million (underlying profit generally excludes non-trading items and is used by Jardine Cycle & Carriage’s management to have a better gauge of the company’s operational performance);
  4. Earnings per share (EPS) and underlying EPS consequently dropped by 4% and 6% respectively to US$1.77 and US$1.82;
  5. Interim dividend remained unchanged from a year-ago at US$0.18 per share (this interim dividend was actually declared in the first half of 2014)

As you can see, there were broad single-digit declines in Jardine Cycle & Carriage’s results. But if you look beneath the hood, the picture is actually rosier.

Astra does business using the Indonesian rupiah as its main currency but Jardine Cycle & Carriage reports in the U.S. dollar. Changes in the exchange rate between the two currencies would thus affect Jardine Cycle & Carriage’s results. And, this was what happened in the first three quarters of 2014 – the company stated in its earnings release that the exchange rate between the rupiah and U.S. dollar “was on average 14% weaker than in the first nine months of 2013.”

As a result, Astra’s 8% increase in net profit in its reporting currency had become a 4% decline after conversion to the U.S. dollar. Meanwhile, a 5% gain in underlying profit in rupiah-terms had turned into a 6% dip in dollar-terms.

As currency fluctuations are not within the company’s control, a better gauge of the progress of Astra’s business would thus come from the changes in its results in its reporting currency. And on that note, Astra – and by extension, Jardine Cycle & Carriage – hasn’t done too badly given its single-digit growth rates, though there are certainly still some warts to be aware of (more on the warts shortly).

The nitty-gritty

While Astra does have its fingers in many pies, it’s actually the Automotive, Financial Services, and Heavy Equipment and Mining segments which are the heavyweights. So, let’s focus on them.

For the first nine months of 2014, the Automotive segment didn’t fare too well – and that’s where the warts are given the segment makes up almost half of Astra’s profits. Astra has the largest market share in Indonesia for car sales but the company seems to be losing ground as its share of the wholesale market for cars had decreased from 53% to 51% with its car sales falling by 1% to 476,000 units. This is certainly something for investors to keep an eye on as we would ideally not want to see Astra cede market share.

Although there were some bright spots in the Automotive segment (for instance, Astra had managed to increased its share of the wholesale market for motorcycles from 60% to 63%), the dominant story is that discounting in the market by Astra’s competitors has “continued to have a negative impact on margins.”

Meanwhile, the Financial Services segment put in a strong showing as net income grew by 14% to US$322 million. But, the bulk of the bottom-line growth there had come from a US$37 million non-trading gain “arising from the recognition of negative goodwill” on the acquisition of 50% of Astra Aviva Life. Without the one-off gain, Financial Services’ net income only inched up by 1% to US$285 million.

Results from the Heavy Equipment and Mining segment come from Astra’s 60% ownership of United Tractors. In the nine months ended 30 September 2014, United Tractors performed really well as net revenue grew 9% while net income surged 41% to US$406 million.

Financial strength

Investors would be happy to note that Jardine Cycle & Carriage ended the third quarter with a strong balance sheet; excluding borrowings from Astra’s Financial Services segment, Jardine Cycle & Carriage has net-debt (total borrowings minus total cash) of US$320 million, which is just 3% of the company’s total equity.


The following is what Ben Keswick, Chairman of Jardine Cycle & Carriage, has to share about the company’s outlook for the rest of the year:

“Astra’s trading performance is expected to remain steady for the remainder of the year but its contribution will again be impacted on translation by a weaker rupiah exchange rate. The results from [Jardine Cycle & Carriage’s] other motor interests are expected to show an improvement. Overall [Jardine Cycle & Carriage’s] results are expected to be lower than the prior year.”

Over the longer-term, in my opinion, Jardine Cycle & Carriage might experience strong tailwinds due to: 1) favourable population demographics in Indonesia; and 2) economic reforms in the country which newly-elected president Joko Widodo is trying to implement. But, the company can only really benefit from those two trends if its Automotive segment manages to stabilise or grow its market share. If it continues losing ground to its competitors, its slice of the pie will become smaller even if the overall pie itself becomes larger.

Meanwhile, investors might also want to keep an eye on currency fluctuations with the thought that a rupiah which stays depressed for prolonged periods of time would be detrimental to Jardine Cycle & Carriage’s results. As I mentioned earlier, this is not something the company has much (if any) control over and currency fluctuations might just even themselves out over time. But that said, it’s still a risk to the company’s longer-term outlook which investors have to consider.

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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 writer Chong Ser Jing does not own shares in any companies mentioned.