Express Transindo Fairytale Is Over

We initiate coverage on Express Transindo with a NEUTRAL call and DCF derived IDR350 TP. The recent cancellation of the M&A from Saratoga’s group due to uncondusive market condition has resulted into 74% YTD dropped in share price. The company’s now focus to improve their financial performance by reorganise their business, lowering gearing level, and improving receivable collections. We see a slower growth and risk in balance sheet and earnings outlook.

Speedy recovery needed
Following the cancellation of M&A deal from Saratoga deal, the management now focus in the next 3-6 months to speed up loan repayment by selling its unused land in Bekasi and Tangerang which we estimate could get additional income of IDR400bn, reorganise the business line by selling its underperforming business (premium taxis and VATB car rental in Jakarta), and improve receivable collections. We see a speedy recovery is crucial to improve the company’s performance.

Soften earnings outlook
Historically, Express Transindo report an average 38% revenue growth in FY12-FY14. However, in the tough market condition (slowdown economy and fierce competition), we see a slower additional number of fleets being purchased of 0/250/500 in FY15/FY16/FY17, respectively. While, we also see muted improvement in daily fixed payment of IDR240,000/day/car.

Fragile balance sheet
The company’s net gearing stood at 1.6x in FY14, with a total debt of IDR1.7trn and IDR215bn cash in FY14. We see an importance to sell their unused assets to repay the debt. The company has surpassed their debt covenant of EBITDA to interest expense of 3x. We estimate the gearing will reduce to 0.98x/0.91x in FY16/FY17.

Initiating coverage with a NEUTRAL call and IDR350 TP
Our DCF-based TP is derived using 11.4% WACC and 3.0% TG, implying 1.8x/5.8x FY16F/FY17F P/E respectively.

Risks
The main risks to Express Transindo are: i) macro economy downturn that could affect purchasing power, ii) inability to raise daily payment from driver, iii) slowing/inability to increase fleet size as the industry is regulated by the government, iv) high gearing ratio.

Investment Thesis
Based on the data from the Directorate General of Land and Transportation, Express Transindo is one of the leading taxi operators in Indonesia, operating primarily in Greater Jakarta. The company has 14.9% share of regular taxi market in Indonesia in 2014. Express operates regular taxis (Toyota Limo in Greater Jakarta) using partnership scheme with its drivers.

Unfavorable Indonesia’s economy condition affecting Express Transindo’s performance
Historically, Indonesia taxi industry have been supported by high and stable GDP growth. In 2012-2014, the industry grew at a 31% average pa, inline with the stable GDP growth of 5.5%-6.2%. The industry growth has been declining since FY12 following the weakening of Indonesia economy. Based on our opinion, we do not see the taxi industry revenue will be recovered in the near time, due to slowdown in Indonesia economy and fierce competition in the industry. We estimate the taxi industry will grow at 15%/20% YoY in FY15/FY16.

Soften number of fleet expansions
In the past, Express Transindo has been able to increased the number of additional fleets of around 2,000-2,500 cars per year while adjusting the daily fixed payment along the way. The recent merger and acquisition deal from Saratoga to purchase the majority of the Rajawali’s group shares in Express Transindo is disabling the company’s movement and expansion during FY15, specifically since March 2015. In FY15, the company’s will not add number of new fleets and only replace 500 fleets.

We expect slower expansion of additional new fleets in FY16 and FY17 of 250/500 fleets respectively. This was due to the their unstable balance sheet, and lack of license issued by the governor. Due to soften number of fleet expansion, we estimate the revenue to grow at 2.4%/7.8%/9.5% in FY15/FY16/FY17, respectively. While, historically, Express Transindo’s revenue grow on average of 38% between FY12-FY14.

Focus on stabilise their debt level
After the cancellation of Saratoga deal to buy the majority shares of Express Transindo, it leads the company’s to focus on reducing their debt level. In FY14, their gearing level stood at 1.6x with a total debt of IDR1.3bn. In FY16, the company is planning to to paid some of their debt in Bank Central Asia amounting of IDR400bn – in order to reduce their gearing level. In order to paid their debt in FY16, we believe the company needs to sell some of their assets; since their cash is not enough to cover the payment.

The company’s have a cash of IDR215.7bn in FY14. In order to pay off the debt in FY16, the company’s plan to sell their landbank in Tangerang and Bekasi – total of 10.3ha; and selling the office towers in Jakarta. We estimate the company will have additional IDR400bn to cover their debt payment in FY16 and reduce their gearing level to 0.97/0.91 in FY16/FY17.

Initiate coverage on the stock with a NEUTRAL call, x% upside/downside potential. We initiate coverage on Express Transindo with a NEUTRAL call based on our view that:
1. The company is unable to heavily increase the number of additional fleets – which could lead to the slower revenue growth
2. The slowdown in Indonesia economy and higher competition from online appilication have made the company’s unable to raise the daily fixed payment
3. In the short term period, we expect a marginal impact on receivable collections
4. We are cautious over their balance sheet, in FY14, the company’s net gearing at 1.6x. We expect lower gearing in FY16 and FY17 to 0.98x/0.91 respectively. This will be supported by additional IDR400bn income from the sales of landbank and office towers
5. Waiting for a better strategy from the company’s after the cancellation of the Saratoga’s deal

Express Transindo’s share price has fallen 74% YTD from a heavy sell off at the end of September 2015. This was due to the cancellation of Saratoga’s deal; and in our opinion the market has priced in the risk of the cancellation of the M&A deal. Currently, the stock is trading at -2 standard deviation and we believe the stock is cheap for a reason. The inability of the company’s to increase their number of fleets and adjust the daily fixed payment have dragged their performance. Moreover, we are also cautious over their high gearing ratio.

Valuations
We assume a risk free rate of 8%, market risk premium of 5%, equity beta of 0.96 and TG rate of 3%, which results in a WACC of 11.4%. We believe that DCF is the most appropriate valuation methodology, since we believe that EBITDA is more visible in taxi business.

Our drivers for the financial performance
We put into consideration the declining operational and market conditions in FY15. We expect a slower number of additional fleets in 2015 and 2016; while, we believe the average daily income from driver will be maintained at IDR240,000 in 2015 and 2016. Given the macro economy downturn and fierce competition that gives a high level of receivable days; the drivers could not pay the daily fixed payment.

Sensitivity analysis
Given the fact that Express Transindo adopts a partnership program comprising fixed daily payments, its cash flow is predictable and it 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 will attempt to describe the company’s performance given the change in:
1) Additional number of fleets
2) Changes in daily fixed payments
3) 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 maintain its growth. Based on our calculation, it shows that for every change of 500 fleet sizes, bottom line would be affected 3% from our base case.

Sensitivity to daily fixed payment
We estimate flat daily fixed fee in FY15 and FY16 due to macroeconomy downturn and fierce competition. We think the company will increase the daily fixed fee to IDR245,000 (+2%) in FY17; where we believe the recovery in Indonesia economy. Based on management, they indicated that tariff increase is not their first priority at this moment.

Sensitivity to interest rate changes
Express Transindo finances their fleets expansion through high utilisation of debt. Based on our calculation, it shows that every 0.5% increase in interest rate would reduce net profit by 5%. In our estimation, we estimate that the company’s gearing level would reduce to 0.98x/0.91x in FY16/FY17, respectively.

Risks
Taxi fares are regulated. There will be a limited pricing power for Express Transindo – since the taxi fares are regulated. This could limit the charges of daily fixed payment from drivers. As a results, it could hinder the growth of the company.

Increase number of quality drivers, and maintain the drivers. Express Transindo expansion is highly dependent on its ability to secure new drivers as well as to retain them. Furthermore, the quality of drivers is very essential aspect to ensure the higher customer satisfaction level. The company needs to make sure their employees happy to avoid risks such as employees striking or resignation.

Changes in Government regulations
Express Transindo’s operations are highly dependent on government regulations, as we as its ability to expand. In order to expand their number of fleets, the companies need to get a government approval to obtain a new licenses.

Higher cost of funds
Express Transindo’s finance their expansion using debt and cash. The bank loans that is obtained currently bears as average cost of debt at 12% interest rate p.a. Any increase in cost of fund would be negative to the company’s profit margins.

Fierce competition
Competition from the existing and new players will have a significant impact to Express Transindo’s performance. Currently, the competition is getting tougher as the new online application company, called Uber – has entered into Indonesia market. Uber is applying an illegal move by lowering their tariff.

Brand equity name
In the transportation industry, the quality of the service is a key factor to succeed. Customers are prefer to choose the brand that they are comfotable with in order to ensure their safety level. The decline in the brand equity of Express could potentially hurt the performance of the company.

Fuel price hike
Eventhough, the driver partnership of Express Transindo’s allow the company to not bear with the fuel cost. However, significant increase in fuel price could have an impact to the drivers earnings per day. Currently, Express Transindo used the subsidised fuel price and if the Government decided to remove the subsidised fuel, it could potentially have an impact indirectly to the company.

Hold up investment in vehicles purchase
Express Transindo is purchasing the fleets from Astra International through long term agreement. Any disruption of new fleets supply could reduce the company’s potential revenue. Furthermore, the soften investment in capex to buy the new vehicles also could impacted to the muted growth.

Slower fleet expansions results in inferior growth
Regular taxi business is TAXI’s growth backbone. The regular taxi segment (Express) has been and will be the Express Transindo’s main growth backbone in the future given rising ridership demand, lack of public infrastructure, and due to their well known brand name. The Express Transindo’s ability to expand its fleet will be determined by their access of financing, as well as ability to retain drivers with their unique partnership scheme. In 2014, the regular taxi business contributed 84%% of Express Transindo’s total revenue and the other 16% came from other businesses line such as premium taxi, value added business, and vehicles for rent (VATB).

Partnership scheme guarantees steady income to their drivers
Express Transindo’s introduced the partnership scheme to their drivers in 2002, making it a pioneering system that help to boost their growth in the past. The partnership agreement has supported Express Transindo’s aggresive fleet and it impacted to high earnings growth since then (38% CAGR between FY11-FY14) on the back of its ability to maintain steady revenue, stable profitability, and attract new drivers to joint the group. The partnership scheme consists of an initial deposit, a daily collection fee, and the option of car ownership in the end of the contract.

Drivers paid the fixed fee per day
The daily fixed fee guarantees a steady income stream on each taxi. Currently, Express Transindo charged the driver of IDR240,000/day for Jakarta and Greater Jakarta areas. While, in outside Jakarta, Express Transindo charged IDR210,000/day. As an incentive for drivers, they can receive two free days if they fulfill the daily payment in full from the beginning of the month until three days to the end of it.

Express has no service and maintenance risk because the drivers are responsible for this – the drivers need to pay IDR40,000/day for maintanance deposit. Express Transindo’s daily payment has increased at 5% CAGR between FY10-FY14. We estimate that Express Transindo will maintain their fixed daily payment at IDR240,000 in FY15/FY16 – due to higher competition and macro economy downturn.

Soften number of fleet expansions
In the past, Express Transindo has been able to increased the number of additional fleets of around 2,000-2,500 cars per year while adjusting the daily fixed payment along the way. In 2014, the Express Transindo total number of fleets is 10,500. However, due to the current economy condition, fierce competition, bad financial position, and lack of licenses issued by the governor – resulted in the company’s made a realistic target for 2015.

In 2015, there are no additional number of fleets and its only replacement of fleets of 500 cars. We estimate slower number of additional fleet in FY15/FY16/FY17 of 0/250/500 units respectively. In FY15, The company was unable to expand their capital expenditure to add number of fleets due to the due dilligence and acquisition plan’s process from Saratoga group.

Growth will deteriorate due to inability to raise more financing
In the past, the growth of Express Transindo was also assisted by the capital financing, either used the bank loans, or bonds. The company’s access to the external financing is a vital for the fleet expansion. The company sourced most of their bank loans from Bank Central Asia (BBCA IJ, NR). The recent failure of acquisition from Saratoga group has impacted in the performance of the company. The company’s strategy to reduce their debt structure in FY16 will have an impact to their financial performance – slower additional number of fleets and muted revenue growth.

Focus on stabilise their debt level
After the cancellation of Saratoga deal to buy the majority shares of Express Transindo, it leads the company’s to focus on reducing their debt level. In FY14, their gearing level stood at 1.6x with a total debt of IDR1.3bn. In FY16, the company is planning to to paid some of their debt in Bank Central Asia amounting of IDR400bn – in order to reduce their gearing level. In order to paid their debt in FY16, we believe the company needs to sell some of their assets; since their cash is not enough to cover the payment. The company’s have a cash of IDR215.7bn in FY14.

Assets on sale
Express Transindo is planning to sell their landbank in Tangerang and Bekasi – total of 10.3ha; and selling the office towers in Jakarta. Furthermore, the company also plans to slim down the business line in the premium taxis. Some of the cars from the premium taxis will be sold due to slim profit margin, such as Mercedez Benz unit. In addition, the company also plan to close their limousine services – the limousine services in Jakarta is not profitable and the company is planning to transfer the fleets in Jakarta to Bali (which is more profitable). We estimate the company will have additional IDR400bn to cover their debt payment in FY16 and reduce their gearing level to 0.97/0.91 in FY16/FY17.

Capex will be minimal – slower fleet expansion
Historically, the company’s has expanding its fleet at 2,000-2,500 cars/year and have a high capital expenditure level. However, we believe the company is going to slow down their expansion for 2015 and 2016 due to lower their debt level. We estimate the company to disburse their capex at IDR310bn/IDR358bn/IDR420bn in FY15/FY16/FY17 respectively. Given the slowdown in capex, we estimate the company’s number of additional fleet will be very minimal.

Sluggish revenue growth
Due to the company’s new strategy to reduce and stabilise their debt level, we believe that Express Transindo’s will report a sluggish revenue in FY15 and FY16. We estimate that the company’s revenue will grow at 2.4%/7.8%/9.5% in FY15/FY16/FY17, respectively. Furthermore, we also estimate that the gross margin will deteriorate to 39.5%/38.5%/37.2% respectively.

This was due to higher cost from depreciation expenses and fuel price. The company’s decision to operate their new brand regular taxi called Eagle taxi will have an impact on their cost – if the fuel price is higher. Eagle business line is different from the Express brands. The Eagle brands is following the Blue Bird business model; where the company’s have to pay the fuel expenses.

Performance will be dragged by high interest expense
Due to their higher gearing level, the company’s net profit will be dragged by higher interest expense. We estimate the company’s net profit of IDR72bn/IDR392.9bn/IDR114.9bn in FY15/FY16/FY17, respectively. In FY16, we put into consideration of the additional income from the sale of their assets of IDR400bn.

High receivable days due to bad economy condition
In the slowdown of the Indonesia’s economy, there is an impact to the Express Transindo business model. We estimate that the company’s receivable will increase due to the drivers were unable to pay their daily fixed payment of IDR240,000. In 1H15, the company’s receivable was increased to 128 days from 114 days in 1H14. According to the company’s management, in the current economy and sector condition, the Express Transindo’s drivers could only achieved IDR555,000/day/car from normally at IDR650,000/day/car. The reduction in the daily drivers revenue impacted in the daily payment to the company.

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

It has also expanded into the premium taxi segment and value added transport business (VATB) or limousine/busses rental services. Its premium taxi, Tiara Express, serves Jakarta while the value added transportation business (VATB) – namely via Express Car Rental, Express Limousine and Express Eagle High (bus) – operate in Jakarta, Bandung, Bali and Lombok.