Thursday, April 21, 2011

Cement Sector 1Q11

by Kresna Securities

We maintain our OVERWEIGHT recommendation on the sector. Robust domestic cement sales growth of 11.3% YoY in Mar11 and 8.6% YoY in 1Q11 affirm rosy outlook on the sector. Given strong FY10 property marketing sales as well as 1Q11 new contract jump obtained by state construction companies (WIKA's +55.2% YoY and ADHI's +85.6% YoY), we believe demand still have ample room to expand in the following quarters. SMGR is still our top picks in the sector given its attractive valuation of FY11 P/E of 13.2x (vs INTP's 15.8x and SMCB's 15.5x) yet it offers the largest potential upside of 28.4%.

· Robust domestic appetite in March. Domestic cement sales rose by 11.3% YoY from 3.4m tons in Mar10 to 3.8m tons in Mar11, while compared to Feb11, it grew by 14.9% MoM. On year to date basis, domestic cement sales in 1Q11 recorded growth of 8.6% YoY to 10.6m tons from 9.7m tons in 1Q10.

· Java & Sumatera: the backbone. In 1Q11, Java and Sumatera posted growth of 12.3% YoY and 13.7% YoY, respectively, while sales in other islands were declining. Interestingly, East Java was the only province in Java that suffered a decline by 9.6% YoY, while the strongest growth was recorded in Jakarta (+26.9% YoY) and Banten (+23.9% YoY). In Sumatra, the growth was supported by hefty demand in Lampung (+42.9% YoY), West Sumatera (+41.5% YoY) and Riau (+29.6% YoY). Robust growth in Sumatra and Java are likely to sustain for the next couple of years as the government is developing mega project of East Sumatra-North West Java economic corridor.

· SMGR: flat performance in 1Q11. SMGR's sales volume only up by 1.4% YoY to 4.3m tons in 1Q11 from 4.2m tons in 1Q10, resulting a decline in market share from 43.6% in 1Q10 to 40.7% in 1Q11. Growth in 1Q11 centered in areas near company's plants: West Sumatera by 39.1% YoY, Riau by 19.3% YoY, Jakarta by 35.8% YoY, Banten by 30.3% YoY and Sulawesi by 11.8% YoY. We believe this is part of company’s strategy to maintain profitability through better price and lower distribution cost. For a note, distribution cost accounts about 40% of operational expenses.

· INTP: gaining in Java & Sumatera. Company's sales in Java and Sumatera grew above 15.0% YoY in 1Q11 vs regional’s average of 12.3% and 13.7%, respectively. Consequently, INTP’s market share increased by 1.1% to 40% in Java and 0.2% to 15.6% in Sumatra. The management said it is still maintaining its profit oriented strategy and will carefully pass on the cost increase arising from energy price increase to the customers.

· SMCB: growing from aggressive pricing. The company posted remarkable domestic volume growth of 31.1% YoY to 575.5K tons in Mar11 and 24.4% YoY to 1.6m tons in 1Q11. In the first quarter, SMCB’s market share in all areas except Sulawesi increased by 0.3%-2.5%, translating to an increase in national market share by 2.0% to 15.4%. We sees that this was the fruit of aggressive pricing policy. Unlike others, SMCB stated that it will not increase the price soon as impact of energy price increase can still be mitigated by the decline in FC/unit resulting from increasing production volume.

· Price anomaly in 1Q11. In early of the year, cement prices in North Sumatera and Bengkulu jumped significantly by 25%-29.2% MoM. The causes were: 1) disruption in distribution due to long queue at the port, and 2) tight cement supply in Feb11 due to maintenance activity. However, the issues now have been resolved and cement prices have returned to normal in Mar11.

· SMGR: turnaround in market share should be seen in 2H11. 1Q11 market share (MS) of 40.7% is lower than our FY11 assumption of 43.3%. We are not surprise by this because impact of de-bottlenecking will due in 2H11. We believe it’s too early to make any revision solely based on volume data. For us, profit is more matter than revenue. However, in our model, a 1.0% cut in MS assumption will lead to a 4.1% cut in FY11 EPS target and 3.3% cut in TP. TP Rp 12,200

· INTP: things are still running according to our prediction. 1Q11 MS of 30.7% is still relatively inline with our FY11 assumption of 32.0%. Hence, we still maintain our FY11 earnings target and TP on the counter at the moment. To see the sensivity, a 1.0% cut in MS assumption will lead to a 3.7% cut in FY11 EPS target and 4.0% cut in TP. TP Rp 18,700

· SMCB: Strong market share but question mark on margin. 1Q11 MS of 15.4% is still inline with our FY11 assumption of 14.5%. However, we are worry about company’s profitability outlook. In our model, we forecast gross margin to improve from 37.7% in 2010 to 39.4% in 2011. Should the company continue to maintain an aggressive pricing policy, there is possibility that gross margin will be flat this year. This will lower our FY11 EPS by 6.7% and TP by 4.3%. TP : Rp 2,350

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