Express Transindo Hoping For a Swift Recovery

We initiate coverage on Express Transindo with a NEUTRAL and a DCF-derived IDR200 TP. The Saratoga M&A cancellation on non-conducive market conditions resulted in a 74% YTD drop in share price. Its focus now is on improving the financial performance via a business reorganisation, lowering gearing levels and improving receivables collection. We opine for slower growth smid risks in the balance sheet and earnings outlook.

Speedy recovery needed
Following the cancellation of the M&A deal with Saratoga Investama Sedaya (Saratoga), Express Transindo Utama (Express Transindo) is now focused over the next 3-6 months on speeding up its loans repayments by selling its unused land in Bekasi and Tangerang, which we estimate could result in additional income of IDR400bn. Management is also looking to reorganise the business line by selling its underperforming businesses, ie premium taxis and value-added transportation business (VATB) car rentals in Jakarta, and improving its receivables collection. We opine that a speedy recovery is crucial in improving the company’s performance.

Softer earnings outlook
Historically, Express Transindo booked an average revenue growth of 38% in FY12-14. However, in the tough market conditions currently of economic slowdown and fierce competition, we lower our expectations for its regular taxi expansion plan and estimate for an operating fleet expansion of 0/250/500 in FY15/FY16/FY17 respectively. We also see muted improvements in daily fixed payments of IDR240,000/day/car. It is also our assumption that Express Transindo is going to sell its VATB rental business in 2016.

Fragile balance sheet
The company’s net gearing stood at 1.6x in FY14, with a total debt of IDR1.7trn and IDR215bn in cash. We estimate lower gearing to 0.98x/0.91x in FY16/FY17 respectively on additional income from the sale of assets.

Initiating coverage with NEUTRAL and IDR200 TP
Our DCF-based TP is derived using 12.5% WACC and 3% TG, implying 1.8x/5.8x FY16F/FY17F P/Es respectively. Express Transindo needs to resolve the concerns relating to its balance sheet and cash flow before it can refocus on growing its business. We expect the company to undertake the sale of assets in FY16, which could be its turning point.

Risks: ability to secure and retain new drivers; increased competition.

Initiating coverage with a NEUTRAL based on our view that:
i. The company is unable to heavily increase its additional fleet numbers, which could lead to slower revenue growth
ii. The slowdown of the Indonesian economy and higher competition from online apps has hampered Express Transindo’s ability to raise its daily fixed payment model
iii. In the short term we expect a marginal impact on receivables collection
iv. We are cautious over its balance sheet. In FY14, the company’s net gearing stood at 1.6x. We expect lower gearing in FY16/FY17 to 0.98x/0.91 respectively. This would be supported by an additional IDR400bn in income from the sale of landbank and office towers
v. We are waiting to learn of a strategy direction from Express Transindo after the cancellation of the Saratoga deal

Softer fleet expansion numbers
In the past, Express Transindo has been able to increase its additional fleet numbers by around 2,000-2,500 cars per year while adjusting the daily fixed payments along the way. The proposed M&A deal with Saratoga to purchase the majority of the Rajawali Group’s shares in Express Transindo obstructed the latter’s movements and expansion in FY15, specifically since March. Hence, during this financial year, the company is not likely to add to its new fleet numbers. It only plans to replace 500 existing vehicles in its fleet.

We expect slower expansion of additional new operating fleet numbers in FY16/FY17 of 250/500 respectively. This is due to the unstable balance sheet and lack of licenses being issued by the Governor of Jakarta. Due to softening fleet expansion numbers, we estimate for revenue to grow at 2.4%/7.8%/9.5% in FY15/FY16/FY17 respectively. Historically, Express Transindo’s revenue grew at an average of 38% between FY12-FY14.

Growth deteriorating due to inability to raise more financing
In the past, Express Transindo’s growth was also assisted by capital financing, either through the use of bank loans or bonds. The company’s access to external financing is vital for fleet expansion and it sourced most of its loans from Bank Central Asia (BBCA IJ, NR). The recent failure of the Saratoga acquisition has impacted Express Transindo’s performance. The company’s strategy to reduce its debt structure in FY16 is likely to have an impact on its financial performance, ie slower additional fleet numbers and muted revenue growth.

Muted daily fixed payments
The daily fixed fees guarantees a steady income stream for each taxi. Currently, Express Transindo charges its drivers IDR240,000 per day for the Jakarta and Greater Jakarta areas. At the same time, outside of Jakarta, the company charges IDR210,000 per day. We estimate that Express Transindo would need to maintain its fixed daily payment rate at IDR240,000 in FY15 and FY16 due to higher competition and the macroeconomic downturn in Indonesia.

Focus on stabilising debt level
After the cancellation of the Saratoga deal, which would have seen the latter buy a majority stake in Express Transindo, this now means that the company has to focus on reducing its debt level. In FY14, Express Transindo’s gearing level stood at 1.6x, with total debt at IDR1.3bn. In FY16, the company is planning to pay some of its debt to Bank Central Asia amounting of IDR400bn in order to reduce this gearing level. To pay its debt in FY16, we believe that Express Transindo needs to sell some of its assets, as its cash is not enough to cover the payment.

The company has cash of IDR215.7bn as at FY14
In order to pay off the debt in FY16, it plans to sell its landbank in Tangerang and Bekasi – 10.3ha in total – and sell its office towers in Jakarta. We estimate that Express Transindo is likely to have an additional IDR400bn to cover its FY16 debt payments and would be able to reduce its gearing levels to 0.97/0.91 in FY16/FY17 respectively.

The company’s share price has fallen 74% YTD from a heavy sell-off at the end of September. This was due to the cancellation of the Saratoga’s deal and, in our opinion, the market has priced in the risk of the deal’s cancellation. Based on a 12-month forward P/E, Express Transindo’s valuation looks appealing (6x FY16 P/E). It is also trading at -2SD.

However, we still think that the company would continue to face its earnings risk due to the tougher competition in the market. We are only likely to turn positive on the counter once we see evidence of an operations turnaround and the achieving of its short-term goals.
Valuation

We believe that DCF is the most appropriate valuation methodology, since we consider that EBITDA is more visible in the taxi business. The charts below show our assumptions for revenue, EBIDA and net income which we incorporated into the DCF model

Our drivers for financial performance
We take into consideration the declining operational and market conditions in FY15. We expect a slower additional fleet numbers in 2015 and 2016 while believing that the average daily income from taxi drivers would be maintained at IDR240,000 during the same period. Given Indonesia’s macroeconomic downturn and fierce competition that have given rise to high levels of receivable days, its drivers were not able to pay the daily fixed payment rates.

Given the fact that Express Transindo adopts a partnership programme comprising fixed daily payments, its cash flow is predictable and relies on a growing fleet to expand. As the company also relies heavily on loan financing to support its fleet expansion, it is also sensitive to changes in interest rates. That being said, we attempt to describe Express Transindo’s performance given the changes in:
i. Additional fleet numbers
ii. Changes in daily fixed payments
iii. Changes in interest rates

Sensitivity to fleet size growth
We see the ability of the company to increase its fleet size is a key to maintaining its growth. Based on our calculations, every 500 vehicles change in fleet size affects bottomline by 2.2% from our base case.

Sensitivity to daily fixed payments
We estimate for flat daily fixed fees in FY15 and FY16 due to the macroeconomic downturn and fierce competition. We think Express Transindo would only increase the daily fixed fee to IDR245,000 (+2%) in FY17, where we believe there is to be a recovery in Indonesia’s economy.

Sensitivity to interest rate changes
Express Transindo finances its fleet expansion through high utilisation of debt. Based on our calculations, it shows that every 0.5% increase in interest rates would reduce net profit by 5.8%. In our estimation, we believe the company’s gearing level would be reduced to 0.98x/0.91x in FY16/FY17 respectively.

Taxi fares are regulated
There would be limited pricing power for Express Transindo since the taxi fares are regulated. This could limit charges of the daily fixed payments from drivers. As a result, it could hinder the company’s growth.

Increasing the number of quality drivers and retaining them
Express Transindo’s expansion is highly dependent on its ability to secure new drivers as well as retaining them. Furthermore, the quality of its drivers is a very essential aspect to ensure higher customer satisfaction levels. The company needs to make sure its employees happy to avoid risks such as employees going on strike or staff resignations.

Changes in government regulations
Express Transindo’s operations, as well as its ability to expand, are highly dependent on government regulations. In order to expand its fleet numbers, the company needs to get government approval to obtain new licenses.

Higher cost of funds
Express Transindo’s finances its expansion using debt and cash. The bank loans that have been obtained currently bear an average cost of debt interest rate pa of 12%. Hence, any increase in funding costs would be negative to the company’s profit margins.

Fierce competition
Competition from existing and new players is likely to have a significant impact on Express Transindo’s performance. In fact, competition is getting tougher as the new online application software company called Uber has entered into the Indonesian market and has lowered its tariffs.

Brand equity
In the transportation industry, service quality is a key factor for success. Customers prefer brands that they are comfortable with in order to ensure their satisfaction and safety levels. A decline in Express Transindo’s brand equity could potentially hurt the performance of the company.

Fuel price hike
Even though, the driver partnership model that Express Transindo has adopted means that it does not have to bear any fuel costs, a significant increase in fuel price could have an impact on its drivers’ earnings per day. Currently, Express Transindo uses the subsidised fuel price and, if the Government decides to remove this subsidised fuel, it could potentially have an indirect impact on the company.

Hold up in vehicle purchase investments
Express Transindo purchases its fleet from Astra International (ASII IJ, NEUTRAL, TP: IDR5,650) through a long-term agreement. Any disruption in new fleet supply could reduce the company’s potential revenue. Furthermore, the softening in capex investment for the buying of new vehicles could also translate into muted growth.

Slower Fleet Expansion Results In Inferior Growth
The regular taxi segment has been the main growth backbone. This is expected to remain the case going forward at Express Transindo, given rising ridership demand, lack of public infrastructure and its well-known brand name. However, the company’s ability to expand its fleet would be determined by its access to financing, as well as its ability to retain drivers with its unique partnership scheme. In 2014, the regular taxi business contributed 84% of Express Transindo’s total revenue, with the other 16% coming from other businesses like premium taxis, VATB and vehicles for rent.

Partnership scheme guarantees steady income for its drivers
Express Transindo introduced the partnership scheme for its drivers in 2002. This was a pioneering initiative that helped boost the company’s growth in the past. This partnership agreement also supported Express Transindo’s aggressive fleet expansion, which had a positive high earnings growth impact on the company (a CAGR of 38% between FY11-FY14).

This was on the back of its ability to maintain steady revenue, generate stable profitability and to attract new drivers to join up. The partnership scheme consists of an initial deposit, a daily collection fee and the option of owning the car at the end of the contract period.

Drivers paid the fixed fees per day
The daily fixed fees guaranteed a steady income stream for each taxi. Currently, Express Transindo charges the driver a rate of IDR240,000 per day for operating in the Jakarta and Greater Jakarta areas. Those outside of these areas are charged IDR210,000 per day. As an incentive for the drivers, they stand to receive two free days if they fulfil the daily payment rate in full from the beginning of the month until three days before the end of this monthly period.

Additionally, Express Transindo has no servicing and maintenance risks because its drivers are responsible for this. In fact, the drivers need to pay IDR40,000 per day as a maintenance deposit. Express Transindo’s daily payment rate has increased at a CAGR of 5% between FY10-14. We estimate for the company to maintain its fixed daily payment at IDR240,000 in FY15 and FY16. This is because of the higher competition in the market as well as Indonesia’s macroeconomic downturn.

Too aggressive an expansion in the past
In 2014, Express Transindo started a new business line of premium taxis and bus rentals. The capex for this was funded by the issuance of IDR1trn in bonds. The company also added 300 luxury cars, ie Toyotas, BMWs and Mercedes Benzs, and 150 buses. Additionally, Express Transindo used the funds to purchase 10.3ha of land in total in Tangerang and Bekasi.

In the bus business, the company explained that the licenses were obtained from government grants to operate a bus business in Jakarta. Bus licenses are hard to acquire, especially if a company does not have any experience in this segment. Express Transindo was looking at opportunities to secure future growth. However, the company was not able to meet its target of operating 150 buses in 2014 and has only been operating 80 as at end-1H15. A lack of resources and experience has been the issue for this business since the beginning of 2015.

Meanwhile, the premium taxi business was started last year. This was done by expanding its existing business through the addition of 300 luxury vehicles to its fleet in 2014. Originally, Express Transindo was expecting the business to work like Blue Bird’s (BIRD IJ, BUY, TP: IDR6,700). It was expecting an average daily revenue per car per day of IDR900,000-1,200,000.

Softening fleet expansion numbers. In the past, Express Transindo has been able to increased its additional fleet numbers by around 2,000-2,500 cars pa while adjusting the daily fixed payment along the way. In 2014, the company’s total fleet numbers stood at 10,500 vehicles, of which 9,467 were regular taxis under the Express brand. However, due to: i) the current economic conditions, ii) fierce competition, iii) its bad financial position, and iv) the lack of licenses being issued by the Governor of Jakarta, Express Transindo has now set a realistic target for 2015, ie no new fleet additions and only replacements for 500 cars.

We estimate for a slower additional operating fleet in FY15/FY16/FY17 of 0/250/500 units respectively. Note too that the company was unable to undertake any capex investments to add any additional vehicles to its fleet. This was because of the due diligence process that was being undertaken under Saratoga’s proposed acquisition plans.

Growth is likely to deteriorate due to the inability to raise more financing
In the past, Express Transindo’s growth was assisted by capital financing, either through the use of bank loans or bonds. The company’s access to this external financing was vital for its fleet expansion. It sourced most of its bank loans from Bank Central Asia. The recent failure of Saratoga to acquire a controlling stake in Express Transindo has impacted the performance of the company.

Thus, Express Transindo’s strategy to reduce its debt structure in FY16 would have an impact on its financial performance. This is because of slower additional fleet numbers, which – in turn – would lead to muted revenue growth.

Price war with Blue Bird
Historically, Express Transindo’s tariffs were cheaper than Blue Bird’s. However, in the latest tariff hike in Dec 2014, the latter decided to use a lower tariff band. This decision by Blue Bird was a blow to Express Transindo’s business, as normally its Express fleet was the second choice of many because of its cheaper tariffs. Furthermore, we believe that Blue Bird’s management has no intention of increasing tariffs to a higher band in the near term.

Focus on stabilising debt level
After the cancellation of the Saratoga deal to buy a majority share in Express Transindo, the company’s focus now is on reducing its debt level. In FY14, the gearing level stood at 1.6x, with a total debt of IDR1.3bn. In FY16, Express Transindo is planning to pay some of its debt to Bank Central Asia amounting of IDR400bn. This is in order to reduce its gearing level. To pay its debt next year, we believe the company needs to sell some of its assets as its cash is not sufficient to cover the payment. As at end-FY14, Express Transindo has cash of IDR215.7bn.

Assets for sale
Express Transindo is planning to sell its landbank in Tangerang and Bekasi – 10.3ha in total – as well as its office towers in Jakarta. Furthermore, the company also plans to slim down its business line in the premium taxi segment. Some of the cars from this wing would be sold due to their slim profit margins, eg the Mercedes Benz unit.

In addition, Express Transindo also plans to close its limousine service in Jakarta where it has not been profitable. The company is planning to transfer this fleet to Bali where it is more profitable. We estimate for Express Transindo to have an additional IDR400bn to cover its debt payment in FY16, and to reduce its gearing levels to 0.97/0.91 in FY16/FY17 respectively.

Capex is likely to be minimal, which means slower fleet expansion. Historically, Express Transindo has expanded its fleet at a rate of 2,000-2,500 cars per year. However, we believe the company is going to slow down its expansion for 2015 and 2016 as it seeks to lower its debt level. We estimate for Express Transindo to disburse capex of IDR310bn/IDR358bn/IDR420bn in FY15/FY16/FY17 respectively. Given the slowdown in capex, we forecast for the company’s additional fleet numbers to be very minimal.

Sluggish revenue growth
Due to Express Transindo’s new strategy of reducing and stabilising its debt level, we believe that the company is to report sluggish revenue in FY15 and FY16. We estimate that its revenue is to grow at 2.4%/7.8%/9.5% in FY15/FY16/FY17 respectively. Furthermore, we also estimate that gross margins are likely to deteriorate to 39.5%/38.5%/37.2% respectively.

This was due to higher costs from depreciation expenses and fuel prices. Express Transindo’s decision to operate a new regular taxi brand called Eagle would have an impact on its costs, especially if fuel prices are higher. The Eagle business line is different from the Express brand as the former follows the Blue Bird business model, ie the company pays the fuel expenses.

Performance to be dragged by high interest expenses
Due to its higher gearing level, Express Transindo’s net profit would be dragged by higher interest expenses. We estimate for the company’s net profit at IDR72bn/IDR392.9bn/IDR114.9bn in FY15/FY16/FY17 respectively. In FY16, we take into consideration the additional income from the sale of assets of IDR400bn.

High receivable days due to bad economic conditions
The slowing down of the Indonesian economy had an impact on Express Transindo’s business model. We estimate that the company’s receivables are likely to increase due to its drivers being unable to pay their daily fixed payments of IDR240,000. In 1H15, its receivables increased to 128 days from 1H14’s 114 days.

According to the management, under the current economic and sector conditions, Express Transindo’s drivers can only achieve IDR555,000 per day per car from IDR650,000 per day per car normally. This reduction in its drivers’ daily revenue has also impacted the daily payments to the company.

Company Background
A taxi service provider with a good track record. Express Transindo was established in 1989 with only 10 cars. With over 20 years of experience on the road, it has become one of the largest taxi service providers in Indonesia. As at end-2014, it has a fleet of 10,500 units. The company operates in several big cities in Indonesia, such as the Greater Jakarta area, Surabaya, Semarang, Lombok, Padang and Medan.

Express Transindo has also expanded into the premium taxi segment and VATB, ie limousines/bus rental services. Its premium taxi brand, Tiara Express, serves Jakarta while the VATB division – namely Express Car Rental, Express Limousine and Express Eagle High (buses) – operates in Jakarta, Bandung, Bali and Lombok.