Wednesday, May 18, 2011

PT. Semen Gresik Tbk

by Kresna Securities

Revenue in 1Q11 jumped by 22.8% YoY, the strongest amongst its peers due to strong cement sales. On the other hand, bottom line grew by only 2.0% YoY to Rp209.0bn due to higher distribution cost. We have downgraded our recommendation from BUY to HOLD as our TP of Rp2,350 suggests limited upside potential of only around 9.3%. Currently, the counter is trading at premium valuation with FY11 P/E of 15.7x compared to its peers (SMGR's at 13.1x and INTP's at 15.5x).

· Strong at top line. The company recorded revenue of Rp1.7tr in 1Q11, jumped by 22.8% YoY due to strong readymix concrete sales which grew by 45% YoY to Rp252.5bn as well as strong cement sales which rose by 19.4% YoY to Rp1.4tr. We believe the strong growth in readymix and cement sales were due to its aggressive pricing strategy by maintaining ASP in order to strengthen its market share. As a result, market shares expanded in almost all areas by 0.3%-2.5%, translating to a 2% increase in market share to 15.4%.

· Sales volume outperformed the industry. During 1Q11, SMCB recorded remarkable domestic sales, posting the highest growth as compared to its peers. Domestic sales grew by 24.4% YoY to 1.6m tons in 1Q11 as compared to the industry’s 8.6% YoY. The biggest growth came from Sumatera (+43.7% YoY) followed by Java (+22.7% YoY) and Bali (+35.7% YoY).

· Lower cement export in 1Q11. The company exported 170,000 tons cement in 1Q11, the lowest quarterly cement export volume since 2007. We believe the decline was attributable to : 1) Bullish oil price, 2) Sturdy domestic demand, and 3) Opportunity to expand its market share.

· No action without consequences. The company’s aggressive pricing strategy to focus more on market share has caused them to incur lower margins. Gross margin decreased by 1.7%. However, operating margin fell by 3.1% particularly due to higher distribution cost which soared by 43.2% YoY to Rp126.0bn.

· Bottom line relatively flat. Compared to outstanding performance at top line, bottom line was relatively flat growing by 2.0% YoY to Rp209.0bn due to higher effective tax rate of 30% in 1Q11 as compared to 27% in 1Q10.

· High distribution cost scrapped the bottom line growth. SMCB's revenue of Rp1.7tr in 1Q11 has met our forecast, accounted for 24% of our FY estimate. However, operating profit of Rp330.9bn and net profit of Rp209.0bn were below our expectation, accounted for only 19.3%-19.5% of our FY estimate. The lower than expected bottom line was caused by 43.2% increased in distribution cost.

· Maintain our forecast in 2011. At the moment, we maintain our forecast on the counter as it is too early to review its yearly performance. We believe our 5%price increase expectation this year should be able to compensate the higher input and distribution cost. Revenue is forecasted to reach Rp7.0tr in 2011, increased by 17.7% YoY with net profit to hit Rp1.0tr.

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