Gajah Tunggal, Fundamentally on Solid Ground

Solid footing in domestic replacement market
In the domestic replacement market, GJTL commands 21%, 50% and 52% of the radial, bias and motorcycle tyre sub-segments respectively. We expect the radial and motorcycle tyre replacement market to keep growing, propelled by the increasing number of cars and motorcycles.

Meanwhile, the sunset bias tyre market is expected to remain flat in the near term and go on a gradual decline over the long term, and eventually be superseded by the truck and bus radial tyre segment.

Increasing exports fuelled by shift to value brands
Despite the softer-than-expected recovery in the US economy and sluggish economic conditions in Europe, GJTL’s exports to both continents surged by 64% last year, spurred mainly by a shift in consumers’ preferences from high-end brands to value brands as their purchasing power diminished, a trend we expect to continue benefit GTJL export sales while may be moderated compared to last year especially for Europe.

This year export growth will also be partially offset by the expected decline in Michelin off-take orders, mostly anticipated in 1Q.

New expansion in the pipeline
This year, GJTL will complete its 5-year expansion that will beef up its radial and motorcycle tyre production capacity by 50% and 200% respectively relative to those in 2005. It is currently considering another expansion plan to increase its tyre production capacity for passenger cars by 11% and kick off the production of truck and bus radial tyres. We have not factored this expansion plan into our forecasts as it is still in the early planning phase.

Forecast revisions
We are changing several of our assumptions to take into account the appreciating USD-IDR exchange rate, declining rubber prices and more muted increase in selling prices moving forward. We are also increasing our discount and rebate cost, which usually edge up amid declining raw material prices.

For the non-operation side, we are ramping up our estimated forex loss to IDR138bn, which changes our FY12 net income and core income forecasts by -4% and +3% respectively, but leaves our FY13-FY14 forecasts relatively unchanged.

Compelling valuation
We maintain our BUY recommendation on GJTL as its current valuation of 8.8x FY12 core PER still looks attractive. In comparison, our revised TP of IDR3,400 implies a FY12 core PER of 12.7x.