Mandiri Sekuritas MASA: Tire-rific

We initiating coverage on Multistrada (MASA), a tire manufacturer, with a Buy recommendation and DCF-based share price target of Rp520 (+48.6% upside). We estimates that the company’s net profit to grow by 25.0% CAGR over the next two years, on the back of strong domestic and export markets. To meet strong demand and anticipate higher demand, the company will expand its production capacity to 28,500 tire/day by 2012 compared with 14, 200 in 2009. It trades at PER10F-11F of 11.7x and 10.1x, respectively.

Growing tire market. We expect that robust domestic automotive sales will lead to strong demand in tire replacement, as around 70% of total Multistrada’s tires sales come from replacement market. By end 2010, outstanding cars in Indonesia may reach 19 million with around 60 million of motorcycles. Gaikindo estimates car sales will grew by 15.8% CAGR over the next five years.

Capacity expansion. Multistrada plans to expand its PCR tire (passenger car radial) and motorcycle tire, with total investment valued US$182mn. PCR tire production capacity is targeted to become 28,500 tire/day in 2012 from 14,200 tire/day by end 2009. Meanwhile, motorcycle tire capacity is targeted to rise to 16,000 /day in 2012 from 4,900 in 2009.

Financial outlook. We forecast its revenue will grow by 33.9% CAGR in the next two years to Rp3.7tn in 2012, generating Rp381bn in net profit in 2012 compared with Rp230bn in 2009. The company booked 1H10 revenue of Rp1.0tn (+23.8%yoy) and net profit at Rp89bn due to 18.9% yoy increase in PCR tire sales volume.

Buy recommendation. We used DCF-method to get a target price of Rp520/shares. We used WACC of 12.7% and terminal growth rate 3.0%. Our target price is equal to PER10F-11F of 17.4x and 15.0x, respectively. From current market price, MASA offers a potential upside of 48.6%. Hence, we give a Buy recommendation on MASA.

What are the risks? Increasing rubber price volatility, competition from domestic and foreign players, foreign exchange volatility as Multistrada’s revenue and cost mainly based on the US dollar, are the main risks for Multistrada’s in our view.