Sunday, June 5, 2011

Holcim Indonesia Tbk

by Samuel Securities

Cost Pressure Market share vs margins. Holcim Indonesia (SMCB) failed to deliver bottom line growth in 1Q11 despite its revenue surged by 23% YoY and domestic market share expanded by 230bps to 15.3%, outperforming its peers. It seems that to enlarge its domestic market penetration, the company has to sacrifice its profitability with COGS/ton up by 19% YoY while distribution cost surged by 43.1% YoY bringing the company’s total selling expense up by 40.2% YoY.

Downgrade earnings by 5%-9%. We cut our ‘11F-12F earnings assumptions by 5%-9% to factor in the company’s lower margin realization in 1Q11 due to energy cost pressure. We believe Holcim’s strategy to expand its market share will result a trade off mainly on the company’s distribution cost as the company has to serve new region with lower profitability compared to its traditional region market.

New era of dividend. SMCB’s shareholder has approved Rp23/share dividend for 2010 earnings as the company has restructured its retained earnings account through quasi organization. We believe the company will starts regularly distribute dividend to shareholder with expected yield of 2-3% in the next 3 years.

Downgrade to Hold with lower TP of Rp2,400. As a result of our earnings revision, our DCF-based target price also down by 4% to Rp2,400. Offering only 6.7% upside from current price, we downgrade our recommendation for SMCB to Hold. We are concern with the company’s lower profitability profile due to recent cost pressure. Despite showing a strong top line growth, we believe the company will struggle to deliver the same growth on the bottom line. SMCB is currently trading at ‘11F PE of 18.6x, the highest compared to its peers. Downgrade to HOLD.

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