Mandiri Sekuritas LTLS: Attractive bargain

Attractive bargain

LTLS recorded operating performance impovement with sales and operating profit increasing by 0.3% and 349.5%qoq. Despite a stronger Rupiah, gross margin kept increasing from 10.9% to 13.1% (normally it went down) showing the company’s stronger price setting power. However, net income fell by 55.8%qoq due to lower forex gain. The company’s products encompass most products in the manufacturing sector, it can serve as a proxy to economic growth. Therefore, we still believe in company’s prospect as we forecast higher 2010F GDP growth of 5.2% (vs 4.3% in 2009F). We still maintain our Buy recommendation as the stock is trading at a very cheap PER09-10F of 7.1-5.1x and PBV09-10F of 0.7-0.6x. At our TP of Rp1,000/share, the stock has 35.1% upside potential.

Better operating results, but lower forex gain. Lautan Luas posted improved 3Q09 operating performance with sales increasing by 0.3%qoq and operating profit increasing by 349.5%qoq after it recorded operating loss of Rp2.1bn in 2Q09. However, 9M09 net income was only Rp61.3bn, or equal to 45.3% of our previous estimates. This was due to -55.8%qoq net income decline in 3Q09. Deteriorating bottom line, despite better opera! ting resu lts, was mainly due to lower forex gain (Rp33.6bn in 3Q09 vs Rp76.9bn in 2Q09) as IDR only strengthed by 5.3% in 3Q09 vs 12.8% in 2Q09. 82.3% of company’s revenues came from domestic sales, therefore, we are still positive toward the company prospects as our economist views that GDP will grow by 5.2% in 2010F.

Stronger price setting power. As inventories are recorded in IDR using US$/Rp rate when it was bought/produced, and there is time lag till sales are recognized using US$/Rp rate at sales date, gross margin was normally squeezed when IDR strengthened, like what happened in 2Q09 when IDR strengthened by 12.8% and gross margin squeezed from 19.5% to 10.9%. However, it was not ! the case in 3Q09 when IDR strengthend by 5.3% and gross margin kept growing from 10.9% to 13.1%. This was due to company’s ability to maintain its margin by adjusting selling price, taking advantage of its strong position in the industry.

Attractive valuation. Our DCF valuation with WACC of 11.55% (9.5% risk- free rate, 5.0% risk premium, and 3.0% TG rate) results in a TP of Rp1,000/share. Besides that, relative valuation methods with PER09-10F of 7.1x-5.1x (JCI: 15.3x-13.8x), and PBV09-10F of 0.7x-0.6x (JCI: 2.9x-2.6x), support our belief that the stock is at bargain pr! ice.