Strengthened Balance Sheet Will Enable Investments In Renewable Energy And Infrastructure

Key Takeaways

• Strategic divestment and increased renewable energy investments are expected to strengthen JC&C's balance sheet and boost future earnings growth.
  
• Expansion in Vietnam and Indonesian market initiatives aim to enhance revenue, diversify income streams, and improve net margins.
  
• Jardine Cycle & Carriage faces challenges from foreign exchange losses, capital recycling risks, and market declines impacting revenue and earnings stability across segments.

Catalysts

An investment holding company, engages in the financial services, heavy equipment, mining, construction and energy, agribusiness, infrastructure and logistics, information technology, and property businesses in Indonesia and internationally.

• The divestment of non-core assets, including Siam City Cement, and strategic capital recycling initiatives have strengthened JC&C's balance sheet, allowing for further capital deployment. This positions JC&C to invest in higher-growth sectors and regions, likely enhancing future earnings growth.
  
• JC&C has increased its stake in REE, focusing on renewable energy, a rapidly growing sector, which accounts for a substantial portion of REE's income. This move is expected to boost revenue and net margins due to the high growth potential and profitability of renewable energy investments.
  
• Astra's continued growth in the infrastructure sector, with a 37% increase in year-on-year profits, along with new investments in healthcare, is expected to drive Astra's revenue and earnings growth in Indonesia. These sectors provide new income streams and diversification, strengthening long-term growth prospects.
  
• Strategic expansion in Vietnam, particularly through THACO's growth in the automotive, agriculture, and property sectors, is expected to contribute significantly to future earnings growth as these sectors ramp up operations, leading to increased revenue and diversified income streams.
  
• The focus on enhancing automotive earnings in Indonesia, especially through Astra's initiatives in the used car market with OLX Mobi, is anticipated to drive revenue growth and improve net margins by leveraging downstream profit opportunities, such as finance, insurance, and service offerings.

Jardine Cycle & Carriage Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Jardine Cycle & Carriage's revenue will decrease by 0.9% annually over the next 3 years.
• Analysts assume that profit margins will increase from 4.2% today to 5.3% in 3 years time.
• Analysts expect earnings to reach $1.2 billion (and earnings per share of $3.16) by about March 2028, up from $945.8 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 7.6x on those 2028 earnings, down from 8.0x today. This future PE is lower than the current PE for the SG Industrials industry at 14.7x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.23%, as per the Simply Wall St company report.

Jardine Cycle & Carriage Future Earnings Per Share Growth

Risks

• Jardine Cycle & Carriage's underlying profit declined by 5% in 2024, in part due to foreign exchange losses, which could impact future revenue stability if similar currency fluctuations continue.
  
• The disposal of Siam City Cement resulted in a $127 million loss, highlighting potential risks in capital recycling strategies that could affect net margins.
  
• Astra's automotive net income decreased by 2% amid a 14% decline in Indonesia's new car market, presenting a challenge to maintaining revenue growth in the automotive segment.
  
• JC&C's non-Astra portfolio saw a foreign exchange loss and an unrealized fair value loss, which raises concerns about investment stability and could impact overall earnings.
  
• REE's earnings were 6% lower due to less favorable water conditions impacting renewable energy, indicating potential revenue volatility in the energy sector due to external environmental factors.

Valuation

• The analysts have a consensus price target of SGD24.46 for Jardine Cycle & Carriage based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of SGD26.45, and the most bearish reporting a price target of just SGD21.71.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $22.9 billion, earnings will come to $1.2 billion, and it would be trading on a PE ratio of 7.6x, assuming you use a discount rate of 8.2%.
  
• Given the current share price of SGD25.6, the analyst price target of SGD24.46 is 4.7% lower. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.