Danareksa Gajah Tunggal Margins upgrade

Reiterate BUY, TP raised to Rp1,090

We raise our FY10-11E EPS estimates by 29%-22% on higher gross margin estimates. Accordingly, our TP is upped to Rp1,090, implying an attractive valuation of 6.46x-5.4x PER and 1.18x-0.97x PBV. We remain a Buyer of the stock, confident that the company will be able to further expand following its debt restructuring. We forecast rapid sales growth of 17% 2-yr CAGR in 2010-2011 as the domestic tire market takes off. The shares have performed well this year – up 69.4% YTD – but we believe there is more to come as the stock still trades below its book value.

Higher gross margin estimates
Following the announcement of the 2009 results, we have looked again at the company’s
strategies and come away with a favorable impression. Margins are improving and we believe there is more room for the company to continue growing its high margin business. This prompts us to upgrade our gross margin estimate to a very decent 17.9% for 2010, supported by GJTL’s commitment to expand sales through its 12 Carrefour and 31 TireZone outlets. Also helping to boost margins are the firm rupiah (some 75% of GJTL’s production costs are US$ related). Note that we forecast higher margins despite higher forecast rubber prices that will push up average raw material unit costs by 21% this year. In our view, GJTL will remain successful at passing on its rising material costs to its customers - albeit with a six-month time lag.

Domestic 4W tire sales: a strong start to the year
4W tire sales shot up in the first two months of the year, growing a spectacular 53.3% YoY to 7.9mn tires, as domestic economic conditions improved further. And with the economic outlook increasingly rosy, we upgrade our sales volume estimates for radial and bias tires by 15.2%-4.8% in 2010, largely compensating for softer selling prices compared to our previous forecast. All in all, we forecast tire sales revenues to grow 18.2% this year.

Good FY09 results
As expected, the FY09 results were very good. The EBITDA of Rp 1.5 trillion was 27% above our previous expectation, supported by a much higher-than-expected gross margin of 23% (mainly due to lower raw material prices). The balance sheet is also in very good shape and net gearing at the end of 2009 stood at 121%, somewhat lower than our previous estimate of 155%.