Multistrada Arah Sarana, Fully Valued

Unique business model
We continue to like MASA’s unique off-take business of producing branded tyres for multinational distributors, which allows the company to leverage on these distributors’ strong networks and substantial demand. The competition in this segment is relatively benign as the big players are not eager to serve third-party brands while the smaller ones are limited by the capital investment needed.

Historically, this type of business relationship, combined with MASA’s discretionary raw material purchase policy, have led to more stable gross margins compared to that for other players.

Potential headwinds
Despite its solid business model, demand from Western Europe may be dampened by current sluggish economic conditions. To mitigate this risk, MASA aims to expand into Eastern Europe and other smaller countries with high growth potential. For instance, it has a joint venture in Kazakhstan that is currently in a development phase. MASA will also strengthen its domestic market position by supplying tyres to Daihatsu starting from 4Q12, on top of serving existing clients like Suzuki and Mitsubishi.

It plans to expand its footprint in the domestic replacement market by opening 100 speed tyre shops in 2012. The company, which completed the second phase of its production capacity expansion at end-2011, will ramp up its capacity for passenger car and motorcycle tyres by 72% and 100% relative to levels in early 2010. However, it may postpone the next phase of its passenger car radial tyre capacity expansion of 23% to the end of the year in view of the softening demand.

Mixed views on non-core venture
MASA recently announced that it will venture into the industrial land business via a newly-established subsidiary, Kawasan Industri Multistrada. This subsidiary has the licence for a 210-ha land in Cikarang, of which 80ha is already used for MASA’s tyre plant. Of the remaining 130ha, 40ha is in the process of being cleared, with another 50-60ha slated to be cleared this year. Although we are positive on the current upcycle in the industrial land business, we also deem this move risky as MASA is venturing beyond its core competence

Forecast adjustment
We have tweaked several assumptions for our forecast, including a weaker IDR against USD, easing rubber prices and declining ASP growth, which result in our gross profit being tweaked down by ~2%. We also increase our opex forecast to reflect higher marketing costs and general expenses. In tandem with the changes to our USD-IDR assumption, we also increase our forex loss forecast to IDR69bn. All in, our core income forecasts for FY12-FY13-FY14 are now lower by 15%-14%-17%, with our net income forecasts also lower by 32%-14%-17% respectively.

Valuation
While we like the company’s business model and growth potential, we think its current share price valuation is quite rich compared to those of other autoparts companies. Hence, we change our call to Neutral. We also adjust our TP to IDR510, which implies 19.5x-15.7x FY12-FY13 core PERs.