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Interhides (IHL) - SELL

Sector: Automotive
Sector Rating: Neutral
Current Rating SELL
Previous Rating SELL
‘08 Fair Value Bt6.90
Market Price Bt8.90
Consensus Bt5.51

1Q08 net profit grew in line with vehicle production growth. Strong 2008 norm. profit growth outlook. Share price exceeds our fair value. 

1Q08 net profit grew in line with vehicle production growth. IHL announced a strong 1Q08 net profit growth of 41% YoY totaling Bt52mn, which exceeds our forecast of Bt30mn due to a higher-than-expected margin, and also marks a turnaround from a 4Q07 loss of Bt7mn. This resulted from 1) revenue of Bt496mn, which rose by 23% QoQ and 51% YoY on orders from Honda for its new Accord model and from Toyota for its new Altis; and 2) a major improvement in gross margin to 19.3% from 6.5% in 4Q07 as the rate of loss declined after the company switched to a domestic raw material supplier after experiencing poor quality from a supplier in South Africa. 

Strong 2008 normalized profit growth outlook. IHL’s 2008 earnings growth prospects look bright after it was able to solve the problem of poor quality raw material in 1Q08 and as revenue should grow by about 22% YoY to Bt1.85bn on increasing demand for vehicle leather seats learn forex trading system, which will provide a boost to the gross margin from 13% in 2007 to 19.7%. In addition, we are revising up our full-year normalized profit forecast by 19% to Bt187mn, representing a surge of 202% YoY to reflect the higher-than-expected 1Q08 net profit. Note that 2007 normalized profit excluded provisions of Bt150mn that were set aside for a loss stemming from a lawsuit filed by TAMC when IHL cancelled its debt restructuring plan. 

Share price exceeds our fair value. Although we expect IHL’s normalized profit growth for 2008 will be strong at 202% YoY and much higher than estimated average growth of our seven covered automotive & parts firms of 30% YoY, we reiterate “Sell” as the stock is trading on a demanding P/E of 15x EPS compared to the sector’s average of 9-10x and exceeds our fair value of Bt6.9, which we revised up from Bt5.5 based on a P/E of 11x, which has already priced in all positive factors.