Mansek AKRA:Alleviating the cost pressure

AKRA posted 1H10 net income of Rp141bn (+27.5%yoy, +0.4%qoq). Even though this figure is slightly below our forecast, it is not surprising as the big chunk of full-year profit should come in 2H10 on cheaper raw materials, as stated in our previous report. The company performed very well in petroleum and basic chemical businesses with strong volume and pr! ofit marg in growth. However, for manufacturing division, high raw material price hurt profits, despite of 25%yoy volume growth. We share the company’s management believe on cheaper cassava price in 2H10 as a result of normal harvest. Therefore, we maintain our forecast and Buy recommendation on AKRA that currently is trading at PER10-11F of 13.2-10.3x.

1H10 net profit grew 27.5% yoy. AKRAposted 1H10 revenues of Rp 5.2tn (+32.6%yoy and +14.6%qoq), which was inline with our FY10F forecast. Bottom line was at Rp141bn (+27.5%yoy, +0.4%qoq), which represented only 41.9% of our FY10F forecast, due to margin contraction in sorbitol manufacturing business. However, these results are not surprising as we have already noted it in our previous report that the company would slightly suff! er margin shrinkage in 1H10.

Outstanding volume growth across all businesses, but margin contraction for manufacturing business. AKRA’s 1H10 operational performance was outstanding with volume growth in all businesses. Sales volume from petroleum, basic chemicals, and manufacturing businesses grew by 25-27%yoy. Gross profit/unit increased by 46.0%yoy for petroleum and basic chemical businesses. However, gross profit/unit contraction of manufacturing busi! ness (-41 %yoy) eroded the other businesses’ growth as manufacturing represented 49% of operating profit.

2H10 should be better. For AKRA during FY10, main concern is on cost management of manufacturing division, while the other division performed very well. Cassava price in 1H10 increased sharply due to lack of planting 6 months ago. Based on company’s management and cross check with other cassava player, they expect lower cassava price in 2H10 due to normal re-planting in 1H10 that will lead to normal harvest. For other businesses, volume growth should continue in 2H10.

Maintain Buy. We maintain our forecast and Buy recommendation on AKRA due to strong operational performance and our belief on margin improvement in 2H10. Based on DCF method, we arrived at TP of Rp1,300/share (11.9% WACC, 5% TG rate, 20% illiquidity discount). The stock is currently trading at PER10-11F of 13.2-10.3x.