GJTL Weak 2Q11 results as expected TP 3400 - Deutsche

- Top-line remain solid (2Q11 sales +17%yoy, +1%qoq). 1H11 sales reached Rp.5.8tr (+21%yoy) and represent 47% of our FY11F.

- 2Q11 net profit declined to Rp90bn (-46%yoy and -73%qoq) largely due to further gross margin contraction in 2Q11 to 11.6% (1Q11: 14.8% and FY10: 19.7%). The margin contraction is as expected. As we mentioned in our earlier report (7-July-2011, Gajah Tunggal; 2Q11 results "heads-up"), although rubber and oil prices have peaked at the end of Feb-11 and Apr-11, respectively, there is a c.1 quarter lag in terms of transmission to GJTL's costs. 1H11 gross profit accounts for c.40% of our FY11F and consensus forecast; which reflects our expectation of a margin pick up in the 2H11 on the back of lower rubber costs (which is already visible judging from rubber
prices post Feb-11) and the full effect of ASP hike in early-May and another one planned for August-11.

- Based on our numbers, implied 2H11F gross margin is 17.9%; which we believe is achievable. Assuming rubber prices remain stable and maintains its latest price, it would imply a 2H11F average rubbber price of US$4.50/ kg; as a matter of comparison, this is c.10% higher than the avg 4Q10 rubber price (c.US$4.10/kg) when the company recorded a 17.9% gross margin. Hence combined with the higher ASP effect in 2H11F relative to 4Q10, we see our implied gross margin as reasonable.

- Overall, 1H11 headline net profit accounts for 48% of our FY11 forecast (c.45% of consensus). Excluding FX, 1H11 net profit accounts for 40% of our FY11F. Given the robust 2H11F earnings outlook (indeed, we are even more convinced that 1H11 should be the bottom), stock-price weakness on the back of the 2Q11 result presents a buying opportunity.