Bareksa.com - We went to PT Lautan Luas Tbk (LTLS) analyst meeting. With recent developments took place as expected, we continue to recommend BUY on the stock with a TP of Rp 1,180 (33% upside). The 1Q14 results are still in line with our forecast and management revealed expansion plan also came on track so far. The company also continue to focus its effort in higher margin segment of products, to our delight.

Low Revenue Growth, Higher Profitability - In 1Q14, LTLS revenue grew flat +0.07% YoY to Rp 1.4 tn, 20% of our forecast (Rp 6.9 tn). For FY14, the company is optimist to achieve revenue of Rp 6.7 tn, thanks to higher production capacity. We maintain our target revenue.

Margin expanded - Regardless of slower revenue growth in 1Q14, gross profit grew +14.29% YoY to Rp 248 bn, 23% of our forecast. The margin expansion is in line with company strategy, eliminating low margin products and focusing on high margin ones.

Escalating Manufacturing Business - The highest revenue growth came from manufacturing segment (+38% YoY), followed by support & services (+22% YoY); Going forward LTLS plans to focus more on these two sectors which combined offered higher gross profit margin of 23% (vs. 12% distribution’s gross profit margin).

Attractive valuations - We maintain our forecast and our Buy rating on LTLS (TP Rp 1,180), based on 6x 2014F P/E. The stock is attractively priced at 4.4x 2014F P/E.

Low Revenue Growth, Higher Profitability

In 1Q14, LTLS revenue grew relatively flat +0.07% YoY to Rp 1.4 tn, 20% of our forecast (Rp 6.9 tn). For FY14, the company is optimist to achieve revenue of Rp 6.7 tn as they will have higher production capacity, primarily from PT Lautan Natural Krimerindo. Thus, we still maintain our target revenue. Regardless of low revenue growth in 1Q14, gross profit grew +14.29% YoY to Rp 248 bn, 23% of our forecast. This is in line with company’s strategy; eliminating low margin products and focusing on high margin products.

Operating income showed more impressive result, grew by 54% YoY to Rp 126 bn (34% of our forecast). However, if we exclude foreign exchange gain at Rp 33 bn, operating income will be at Rp 93 bn (25% of our forecast).

Focus on the Manufacturing Business

The biggest revenue contributor still came from distribution segment (51.7% of total revenue), followed by manufacturing (38.5%), and support & services (9.7%). However, the highest revenue growth came from manufacturing sector (38% YoY), followed by support & services (22% YoY).

Going forward, LTLS plans to focus more on those two sectors as they offered higher gross profit margin at 23% (vs. 12% distribution’s gross profit margin).

During the meeting, management also showed us sample of their creamer products in sachet, and allowed attendance to have a taste on their Cappuccino sachet. Currently, LTLS has existing capacity of 21,600 MT p.a of Creamer. For FY14, LTLS has budgeted Capex at Rp 300 bn, which mainly used for expansion of PT Lautan Natural Krimerindo (additional capacity 40,000 MT p.a.) at Mojosari, Mojokerto, East Java.

In early 2014, LTLS divested its 30% shareholding in PT Jakamitra Indonesia for Rp 120 bn. This additional fund will be used to support its expansion plan. Here are some of LTLS expansion plan in 2014:

Valuation
We are maintaining our Buy recommendation on the stock. LTLS is currently attractively valued at 4.4x 2014F P/E. Whilst we concede LTLS has a small market capitalization, does not actively traded, and is not a part of most index constituents followed by money managers, we believe the stock worth at least 6x 2014F P/E. Such valuation, we use as the basis for our TP at Rp 1,180.

*Marisa Wijayanto is equity analyst of PT Buana Capital. This article is part of the Equity Research of PT Buana Capital