Multistrada to run rubber plantation
In an extraordinary general meeting on 21 March, tyre maker Multistrada Arah Sarana changed its articles of association allowing it to enter into the rubber plantation business. As a result the firm expects to cut raw material costs by 10 – 15 per cent.
Multistrada plans to enter the rubber plantation business by acquiring 20,000 – 30,000 hectares of rubber plantation. In addition, the company will reportedly build a rubber processing plant with a 5,000 tonnes per annum capacity. The aforementioned rubber plantation would be equivalent to around 70 per cent of Multistrada's annual natural rubber requirements. The acquisition of necessary land is scheduled for completion during the first half of this year.
2011 tyre production is estimated to require as much as 24,000 tons of natural rubber (double the 12,000 tons needed in 2010). The company has detailed information about the investment – amount, funding source, status of the land and the planting/construction schedule all remain unconfirmed. However, Deutsche Bank was positive about the move: “Our initial take on this is that the integration of rubber plantation should help improve Multistrada’s earnings stability amidst volatile rubber prices, however the funding source, investment return and execution risk are areas that need close evaluation.”
Analysts downgrade Multistrada stock to “hold”
More recently on 13 April, financial analysts downgraded their stock rating on Multistrada to “hold” after shares in the company surpassed Deutsche Bank’s target price. The firm’s shares are said to be trading above their weight at a level equal to regional and domestic peers. This is said to be “somewhat unwarranted” because of Multistrada’s relatively smaller scale of operations; smaller market capitalisation and lower liquidity. Additional risks are reportedly include that the “as yet un-clarified plan to enter the rubber plantation business.” As a result the analysts lowered their our full-year 2011 and 2012 earnings estimates by 15 per cent and 2 per cent respectively on rubber and oil cost pressures. However, Detusche Bank concluded: “we remain confident of Multistrada’s ability to deliver strong earnings growth (28 per cent CAGR 2010-13) primarily driven by sales volume growth.”
Meanwhile on 21 February 2011, the Insider Stories website reported that Multistrada plans to hold a rights issue “to increase its working capital as much as US$50 million-$100 million” in order to fund the establishment of the new plantation. But the company’s decision on this is by no means clear and the same report also said that the firm is choosing financing options from list that includes “rights issue, banking loan and internal sources.” According to this report the processing factory/plantation will be built in Sumatra, Central Tapanuli, Kalimantan, and Sulawesi.
Insider Stories quoted Multistrada president director Pieter Tanuri as saying: “Thus, Multistrada plans to hold a right issue and conduct cooperation with the banking institution” making a combination of financing routes perhaps the most likely outcome. “The option to conduct right issue shall be used to back the financing as it must earn the approval of all the shareholders in the extraordinary general meeting of shareholders…the director will unveil all the company’s needs and all the decision depends on the EGM,” he reportedly explained. Furthermore the firm’s 2011 capital expenditure of as much as US$160 million is said to exclude the financing of the expansion in Central Tapanuli.
According to Multistrada, the Indonesian tyre manufacturer produced 5.5 million tyres last year. The new target for 2011 is 8 million units. The latest round of investment and expansion follows a similar of flurry of activity at Multistrada during 2007 and 2008. In December 2007 the company announced plans to increase its production capacity from 17,000 units per day to 40,000 during 2008. The rationale behind this earlier move was to keep pace with demand, which was then averaging 100,000 units per day. At the time the tyremaker exported 85 per cent of its production, with the UK, the Middle East and the US three of its key markets. The firm manufactures both passenger car and two-wheel tyres.
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