JP Morgan - Mid-Small Cap – Multistrada (MASA) and Gajah Tunggal (GJTL)

MASA published information memorandum on its USD185mn debt issue, that requires an EGM. The company is expanding car tyre capacity from 16k/day to 28.5k/day (+78%), and its motorcycle tyre capacity from 8k/day to 16k/day (+100%). The company presents earnings projection until 2011. For FY10E, MASA is forecasting a 33% top line growth but a 12% decline in net profit (to Rp152bn or 10x P/E). For FY11E, MASA is forecasting a 40% top line growth and a 53% growth in net profit (to Rp233bn or 7x P/E). Not hugely attractive P/E for a small cap, but I believe these numbers are ultra conservative, having visited MASA’s factory recently.

There is an overwhelming demand for Indonesian tyre producers to produce more, in light of demand recoveries in USA and Europe, and on import barrier on Chinese tyres. Meanwhile, motorcycle tyre is a new growth area, thanks to the booming motorcycle sales in Indonesia, which is still a net importer of motorcycle tyre. Relocation of manufacturing facilities from China to Indonesia is happening in the tyre industry, but it is taking a different form with Indonesian tyre producers expanding capacity and taking market share. No doubt that these companies are potential M&A target by overseas producers. Meanwhile, GJTL reported a very encouraging 1Q10 number, with a 10% QoQ growth in revenue. Annualizing GJTL’s 1Q10 recurring profit, the implied P/E is about 4x. Annualizing MASA’s 1Q10 recurring profit, the implied P/E is about 9x (but MASA should have much stronger capacity growth 2010-2011).