Danareksa Multistrada Arah Sarana (MASA IJ, Rp370 BUY) Upsizing

BUY with TP of Rp450
We maintain our BUY recommendation on MASA with a higher Target Price of Rp450, implying 15.4x-11.7x 10F-11F PER. Our higher target price reflects: 1) the fact that the dilution from the warrants is less than expected and 2) the roll-over of our DCF base year to 2011. Looking ahead, revenues should grow briskly – by 35% CAGR in the next 2 years in our estimates - supported by the company’s rapid expansion. Currently the stock trades at 13.0x-9.3x 10F-11F PER, or much lower than our estimate of the market 10F-11F PER of 17.4x-15.1x.

Bright sales outlook for 4Q10
On a QoQ basis, we expect sales to be relatively stable in 3Q10 before picking up significantly in 4Q10. Note that sales in 3Q10 were subdued as a result of the long Lebaran holidays. Yet even so, the 3Q10 sales volume should still be around the same level as in 2Q10 when a program was instigated to improve the company’s operations management. The bright sales outlook for 4Q10 is supported by 1) 10% more operational days than in 3Q10, 2) higher production capacity to meet the higher demand and 3) the company’s plan to further increase selling prices in response to rising rubber prices. An indication that higher ASP are to come is reflected in the news that the Goodyear Tire & Rubber Co., a world leading tire manufacturer, has plans to hike its retail tire prices in the US and Canada by as much as 6 percent in October.

Dilution is less than expected
The warrants have expired and only 0.7% have been exercised – good news for the stock in our view. The exercise price was only Rp 250 per share, or a 37.5% discount to our previous NAV/share estimate. Thus, the fact that fewer warrants have been exercised than previously expected helps to increase our NAV/share estimate. The current number of shares has now reached 6.12 billion - or 6.7% less than our previous estimate. Yes, the cash collected from the exercising of the warrants is much less than expected, yet supported by its loan facility, we are confident the company can fulfill the cash requirement for its operations and capital expenditures.

New capacity to come on-stream
By December this year, the production rate should increase to around 19,000 Passenger Car Radial Tires (PCR)/day and 12,000 Motorcycle Tires/day, or up from the current production rate of 16,800 PCR/day and 7,990 motorcycle Tires/day. This increase in the production rate is supported by the capacity expansion and the orders received for the next three months. As a result of the expansion, the company has trained and increased its workforce to around 2,500 employees from only around 1,800 in May this year. Commissioning of the new capacity is expected to take place in October. The production rate is also expected to rise further as the company increases its production capacity to 28,500 PCR/day and to 16,000 motorcycle tires/day by early 2011.