GJTL:Tight rubber - Mandiri

GJTL’s FY10 net profit was below our expectation (90.4%) due to higher miscellaneous expenses. Lower ASP and increased COGS squeezed gross margin from 23.0% in FY09 to 19.7% in FY10. We expect further decline in gross margin this year due to higher rubber cost (we estimate a rubber cost of US$6.0/Kg compared with the company’s guidance of US$4.5/Kg – US$5.5/Kg). Despite that, we still like GJTL because the current valuation has already taken into account the decline in gross margin, in our view. At the current price, the stock is traded at PER11F-12F of 8.2x-7.9x.

FY10 net profit was in line with consensus (95.9%) estimates but below our target (90.4%). While GJTL posted strong revenue of Rp9.9tn (+24.2%yoy, +20.3%qoq) due to sharp volume growth, its bottom line only reached Rp831bn (-8.3%yoy, +33.2%qoq) due to lower forex gains of Rp113bn vs. Rp487bn in FY09. Sales volume of radial tires was up by 35.5%yoy to 10.3mn, backed by robust sales to Michelin, which reached 3.0mn (+54.2%yoy) or represented 29.1% of radial sales.

Lower ASP for radial tire. Based on our calculation, ASP/Kg for radial tires declined to Rp34,004/Kg (-5.2%yoy). We suspect this came from the sales to Michelin which is quoted in the euro. (In FY10, the euro depreciated by 11.5%yoy against the rupiah). In total, blended ASP/Kg declined by 2.2%yoy to Rp40,276/Kg. Meanwhile, higher raw material costs pushed COGS/Kg by 0.9%yoy. Consequently, FY10 gross margin declined to 19.7% from 23.0% in FY09.

Lower gross margin for FY11F. In 1Q11, average rubber price has reached US$5.2/Kg; hence, we assume rubber cost for FY11F at US$6.0/Kg vs. US$3.8/kg in FY10. We believe we are more conservative than the company’s estimates of US$4.5-5.5/Kg. Consequently, we expect gross margin to decline to 18.2% in FY11F. Meanwhile, we target revenue to reach Rp11.7tn (+18.7%yoy) backed by ASP increase of 10.5%yoy. Note that GJTL has increased ASP by around 5-6% in Jan’11 and is expecting to increase ASP on the same percentage on Apr’11.

Valuation. Based on DCF valuation, WACC of 11.5% and TG of 3.0%, we arrived at TP of Rp3,000/shares, included 25% discount for risk of shrinking margin. We maintain buy on GJTL.