MASA: Higher cost passed through - Mandiri

The company book FY10 net income, which was above our expectation (115.9%) but in line with consensus forecast (100.8%). MASA has been successful in passing on increasing costs, which was reflected on the stable gross margin at 21.7% in FY10 vs. 21.9% in FY09. In FY11F, MASA is optimist to increase its ASP by around 11-18%yoy if natural rubber cost hits US$6/kg (vs. US$3.8/Kg). We maintain Buy recommendation on MASA, which is trading at PER11F of 7.8x.

Robust growth in motorcycle division. Even though it’s small contribution to total revenue (some 10%), motorcycle tire division posted astonishing growth. While PCR (passenger car radial) revenue was up by 5.9%yoy, revenue from motorcycle tires increased by 67.3%yoy to Rp201bn in FY10. Such high growth was backed by strong sales volume. In FY10, MASA sold 2.6mn motorcycle tires (+79.7%yoy), while PCR sales was 5.6mn unit (+13.3%yoy).

Pass on cost increase. MASA succeeded to pass on raw material cost increase (+34.9%yoy in US$), which resulted in stable gross margin at 21.7% vs. 21.9% in FY09. Average natural rubber cost doubled to US$3.8/kg in FY10 vs. US$1.9/kg in FY09. Note that natural rubber cost contributes around 16% to COGS, so does synthetic rubber cost. Assuming similar FY10 products mix with that in FY09; blended ASP/kg has increased by 5.6%yoy, parallel with COGS/kg increase of 5.9%yoy. The rupiah’s strengthening did not affect margin significantly as most of production cost is in the US$, matched with the company’s sale revenue which mostly come from exported products. (Exhibit 2)

More efficient. We view that MASA has been able to increase its labor efficiency, proved by lower direct labor cost/kg of 4.3%yoy amid rising minimum wages by 7.8%yoy mandated by local government. We think this efficiency came from higher economies of scale supported by production volume growth. Direct labor & factory overhead contributed 28.9% of COGS (direct labor around 3.5%-4%).

ASP in FY11F may increase up to 18%. In 1Q11, ASP average was US$4.2/Kg vs. US$3.8/Kg in FY10; the company believed there is room to increase the ASP during the rest of FY11 up to US$4.6/Kg if the natural rubber cost hits US$6/Kg (vs. US$3.8/Kg in FY10) to maintain its margin. Hence, the effective ASP increase range is 11-18%yoy. In our estimates, we assume ASP increase by 17%yoy, and increasing direct labor cost same as previous years, generating gross margin at 21.5%yoy. (Exhibit 3)

Maintain Buy. We maintain buy recommendation on MASA. Based on WACC of 10.7% and TG of 3.0% we arrived at TP of Rp520/share, including 43% small market cap discount.