Mandiri Sekuritas FOCUS (02-Jun-2009) LTLS: Whiplash recovery

Whiplash recovery

LTLS quickly recovered from its 4Q08 trough with 1Q09 operating profit growing by 79.9% qoq. The company’s chemical products are widely used in daily necessity products and are the key reason behind this quick recovery. Management also effectively reduced inventory level, leading to lower working capital financing needs. Despite the stock having risen by 34.4% since we made our Buy call, w! e deem at the current level the stock is still cheap with PER09F is 4.8x, PBV of 0.7x and superior dividend yield of 6.8%. We reiterate a Buy on the stock with TP of Rp1,100/share (31.0% upside potential).

Saved by well diversified products. LTLS is a well diversified 1001 chemical product company with strong market share of around 40%-75% in its products range. Therefore, the company has strong resilience in downturn cycle. Note that 69.0% of products distributed by LTLS are daily necessities-related chemical products such as water treatment, consumer, packaging, food, and agric! ulture pr oducts so that they provide stable demand that supports the company’s quick recovery in 1Q09. We see that the company has bounced from its trough with 1Q09 operating profit growing by 79.9%qoq, compared with 4Q08 operating profit which declined by 66.8%qoq (most of the sales were supported by domestic demand).

Prudent tactical response. Facing tougher economic outlook, the company did portfolio rationalization this year by selling one of its newly established subsidiaries which have not generated revenues. The company chose focus strategy to strengthen its existing operating subsidiaries. In the operational level, the company was able to reduce its inventory by 38.4% (equivalent to Rp402bn), therefore, reducing interest expense due to lower working capital financing ne! eds. Part s of the saving from inventory reduction was used to finance receivables increased to support higher sales level.

Attractive valuation. Our DCF valuation with WACC of 12.1% (10.2% risk- free rate, 5.0% risk premium, and 3.0% TG rate) results in a TP of Rp1,100/share. Besides that, relative valuation methods with PER09F of 4.8x, PBV of 0.7x, and dividend yield of 6.8%, support our belief that the stock is cheap compared with the JCI with PER09F of 1! 3.0x, PBV of 2.4x, and dividend yield of 2.8%.