You can contact the author (Teguh Hidayat) by email, teguh.idx@gmail.com. The author live in Jakarta, Indonesia.

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Gajah Tunggal

I’ve been watching the stock of Gajah Tunggal (GJTL) for a long time, ie since about 3.5 years ago when the price was still in the 400s. At the time, the performance of this tire company was recovering after the global crisis in 2008, with a net profit of Rp905 billion in 2009, compared to a net loss of Rp625 billion in the previous year. The slick performance then continues in subsequent periods, and of course the stocks continue to rise until GJTL had briefly reached 3,400 in mid-2011. But since then GJTL kept dropping, and now it is in a position of 2,150. Is it because its performance is not good anymore? Probably not, because until the third quarter of 2012, GJTL still recorded an increase of net profit of 31.4%, or still quite good, and its ROE was still maintained at the level of 20.4%.

PER of GJTL at its current price, based on its latest financial statement, is 7.2 times, aka relatively low, so of course it is quite interesting especially because the trend of the stock movement in the last month appears to have started up again. So how is the outlook? And more importantly, what was the cause of the declining of the stock before? Well, the answer may be related to the company’s policy in managing its debt.

So here's the story. If we use the 2008 data when the company suffered substantial losses, the cause was a expense of bloated loan interest due to the weakening of Rupiah against the US Dollar at the time, given the GJTL debt is denominated in US$. Since the first, GJTL’ debt is quite large, and until now still so. In the third quarter of 2012, GJTL had total liabilities of Rp7.2 trillion, which makes it 1.4 times of DER. More than half of the total liabilities came from its euro bond worth US$ 412.5 million, equivalent to Rp4.0 trillion. The bond was issued in July 2009, and is an extension of the old one. So it can be said that the company prefer to pay old debt with a new one rather than pay it off. The bond of 2009 were scheduled to be mature in July 2014.

But outside of bond, GJTL have not any other interest bearing debts. GJTL had US$ 2 million of short term loan ​​to HSBC Bank, but the debt was paid in March 2012.

Back to the bond. As expected, GJTL paid the 2009 bond by another bond. In December 2012, the management announced that they issue new bond worth US$ 500 million in Singapore, where the fund is used to pay the previous bond. In terms of efficiency, the purpose of the issuance of the new bonds was quite good, which is to reduce the cost of interest. If GJTL was still maintain its old bond, then the company must pay interest at rate of 8 – 10.25 % per annum until 2014. While the new bond only bear 7.5% of interest per annum. So in this way, the company's net profit in the year 2013 could be better. But still, the new bond was responded negatively by the market.

But if GJTL announced its issuance of new bond in December 2012, then why the stocks had slumped far earlier? Perhaps that was because of the weakening of Rupiah against the US Dollar. As you know, the Rupiah exchange rate continues to fall in the last year, from about Rp8,700 to now Rp9,703 per US$. Given that GJTL bond debt is denominated in US$, then the weakening of Rupiah could mean that the value of the bond, including its interest, would increase, so that the net profit of the company can be depressed, given GJTL obtain its revenue in Rupiah.

The good news, GJTL is not obtain all of its revenue in Rupiah, but 37% were in US $ (derived from export). In addition, the increase in net income was still pretty good anyway, which as already mentioned above, 31.4%.

Regardless of the polemic of bond, GJTL is a pretty good company. As of May 2012, GJTL was a leader in the market of bias and motorcycle tires, with the market share of 51 and 50% respectively. For radial tires, GJTL is the third market leader behind Bridgestone and Dunlop. Not only as a manufacturer, GJTL also has business units in the area of retail distribution, the ‘TireZone’ outlets, which have had 56 outlets throughout Indonesia. For the worlwide market, GJTL’ tires have been able to reach 80 countries around the world.

Logo of 'Tirezone'

And did you know that Sjamsul Nursalim, the owner of GJTL, also has a Chinese tire company with the name like Gajah Tunggal? It is GITI Tire, with the location of the factory in Fujian Province, China, but the office is based in Singapore (this is its website, www.giti.com). GITI is listed as the top ten largest tire companies in the world, with its flagship product that is exactly the same with GJTL, GT Radial. Unfortunately, GITI is not placed under GJTL, but became a wholly different company. GJTL itself, if using the data in 2008, was the 28th largest tire company in the world, or much smaller than its Chinese sibling.

Anyway, in this case I could say that GJTL is managed by a world-class corporation, and the company has a good brand equity too. GJTL have a partnership with Michelin, a French leading tire manufacturer, where 10% of GJTL shares was held by Michelin, and GJTL did sell about 13% of its products to Michelin North America, Inc.

Then related to business development, in the year 2012, GJTL acquired 100 hectares of land in the industrial area in Karawang, West Java, worth US$ 108 million. Approximately 60% of the land is used for tire testing circuit (proving ground), and the rest is for a new tire factory. The entire project is scheduled for completion in 2014. Beyond that, GJTL gradually launched two new products, namely a motorcycle tire with brand 'Zeneos', and TBR (Truck and Bus Radial) tires, so GJTL will have a more diversified tire products.

So the conclusion? Yep, the stock of GJTL is attractive mainly because the price is on sale. Related to the issuance of the bond, if we consider that the objective is to save the cost of interest, then it was actually a good corpprate action so there is nothing to worry about. And by considering the name of ‘Gajah Tunggal’ as th leading tire manufacturer in Indonesia, then the fair price of GJTL is the price that reflects PBV of 2.0 times, and that means the price of Rp2,900 per share. Well, perhaps GJTL can not rise to that position in the near future, because the Jakarta Composite Index (JCI) has started to decline. But the position of 2,400 to 2,500 is still makes sense.

However, the right time to buy this stock is when the company's financial statements for the Full Year of 2012 is out later, especially if the latest performance is still good as the previous quarter. But if you want to buy it from now? Well, use small fund first, and do not forget to cut loss if the stock dropped lower than 2,000. Fundamentally, GJTL is less likely to down to lower than 2,000, but just in case, because the Rupiah exchange rate is still far from stable.

Original article was written at March 14, 2013

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