by CLSA Securities
Our cement analyst Di Shui upgrades Semen Gresik (SMGR IJ) to Outperform (from UPF). The new TP is Rp10,400 (from Rp9,500). Our TP is derived from an average 2011-12 EPS applied to 15x PE multiple.
The expansion to add 5mn tons of new capacity in 1Q12 is on schedule.
Moreover, SMGR offers the greatest leverage to commodity wealth driven consumption. SMGR dominates ex-Java franchise. SMGR commands 44% market share in Sumatra, 61% in Sulawesi, 55% in Kalimantan, and 71% in Eastern Indonesia. Java is about 54% of domestic demand in FY10. However, as shown by the chart below, consumption growth in commodity wealthy provinces is outpacing Java and could exceed 50% of demand by 2012.
Other key points from the report:
New capacity in 1Q12. Five million tons new capacity = 9.4% of Indo’s total installed capacity at YE10 = 2x installed capacity of the #4,5,6 largest cement producers in Indonesia = SMGR to add in a quarter 1.7x as much new capacity as it has added over the past decade. This would bring total installed capacity to 25.2m tons.
Semen Padang expansion the next phase. To contribute 2.5mn tons more by 2014.
Immense cash generating capacity. Operating CF has grown at CAGR pf 20% since 2005 and looks to exceed US$500mn in FY11. Raising our domestic sales volume growth forecast to 4% in 2011 following plant upgrades and 12% in 2012 based on speedy construction progress. Capex seems to be peaking = rising FCF? We think capex is going to start to come down from 2013 onward. We have factored in US$300mn for Padang expansion. Potential new capex is SMGR’s coal ambition, (with US$400mn budgeted capex). Upgrade on earnings. Di Shui upgrades the earnings forecast by 5.7% and 4.8% respectively for 2011 and 2012. Even after the earning upgrades, we are still 2% and 8% below consensus for 2011 and 2012. We are more conservative with regard to pricing power. Upgrading the recommendation from UPF to OPF. The new TP is Rp10,400 (from Rp9,500).