Thursday, September 22, 2011

Cement Sector Updates

by Kresna Securities

Robust domestic cement sales growth of 13.1% YoY in 8M11 underscore our OVERWEIGHT recommendation for the sector. We believe its spectacular performance will be continuing in 2H11 with respect to rapid infrastructure development as well as strong property demand, supported by low interest rates. Our top pick for this sector remains SMGR, since we believe the completion of its new plant in Tuban (in operation less than 6 months), will provide a positive catalyst for the counter. Additionally, SMGR's valuation at a FY11 P/E of 12.5x is more attractive than that of INTP (FY11 P/E of 14.8x) or SMCB (FY11 P/E of 15.9x).

Key Catalysts

Aug11 domestic sales slid on Fasting season. Based on Indonesia Cement Association (ASI) data, domestic cement sales volume slid by 17.7% MoM or 0.3% YoY to 3.6m tons in Aug11 due to a corollary effect of the fasting season. Comparing the performance with last year’s fasting season, which took place in Sep10, the Aug11 domestic sales were actually 41.0% YoY higher. On the other hand, national cement export in Aug11 increased by 27.1% MoM to 102.6k tons, mostly driven by SMCB, which recorded 2408.4% MoM growth in its export sales to 32.6k tons.

Java was still the main source of growth. In 8M11, Java posted the highest growth of 15.2% YoY for domestic cement sales, following by Sulawesi (+12.6% YoY), Sumatra (+12.0% YoY), Kalimantan (+11.5% YoY) and Nusa Tenggara (+9.3% YoY). We believe rapid infrastructure development, along with strong property demand, is the key driver for robust sales in Java, particularly for Jakarta and Banten, which posted sales growth of 22.5% YoY and 29.4% YoY in 8M11, respectively. On the flip side, Eastern Indonesia was the only region reporting a volume drop, by 11.2% YoY to 545.9k tons in 8M11. Overall, domestic cement sales in 8M11 were recorded at 30.5m tons, up 13.1% YoY from 27.0m tons in 8M10, and still in line with our forecast of 13.0% YoY.

SMGR gaining market share. Amongst the three top players, SMGR posted the smallest decline, marking just 15.6% MoM on domestic sales volume in Aug11, while SMCB and INTP recorded a drop of 19.7% MoM and 21.9% MoM, respectively. Hence, market share-wise, SMGR improved by 1.0% MoM to 40.5%, while SMCB and INTP declined by 0.4% MoM and 1.7% MoM to 16.1% and 30.8%, respectively.

Expect a 12% MoM growth in Sep11, maintain FY11 growth forecast of 13.0% YoY. Historically, monthly domestic cement sales will rebound strongly post-fasting season. According to our prediction, domestic sales will grow by 12.0%-15.0% MoM to 4.0m-4.1m tons in Sep11 or 57.9%-62.1% YoY higher than that in Sep10. With 8M11 achievement having accounted for 66.2% of our FY estimate, we maintain our FY11 growth target of 13.0% YoY for the moment.

SMGR remains our top BUY in the sector. We continue to favour Semen Gresik (BUY - TP Rp10,950) because of: 1) The progress of its 2 new plants, which have reached around 90% completion: it is estimated Tuban IV will be completed by the end of this year while Tonasa V should come on stream by Mar12, signifying additional capacity of 5.0m tons p.a. in the pipeline, thus resolving capacity constraint issues, 2) During the first 7 months the company has carried out maintenance on its all plants across Indonesia, while during the remainder of this year, the company has only scheduled four maintenance sessions in its plants, namely, Indarung II, Indarung IV, Tuban I and Tuban III. In our view, this signifies lower maintenance costs by the end of the year, while on the upside it will potentially facilitate increased company production volume, and 3) SMGR is the only one who might be able to preserve its net margin (+0.2% YoY) in 1H11, while others are still struggling to control increasing costs.

INTP: a BUY merely because of recent share plunge in the market. We upgrade our recommendation for INTP from HOLD to BUY (TP still at Rp16,650), mainly because of recent price correction. Although the company still possesses excess capacity (and can thus more confidently meet strong demand this year), our concern lies in the company’s margins, which posted a painful fall in 1H11, slumping by 4.3% to 47.4%, the sharpest decline among its competitors. Valuation wise, INTP is now trading at a 7.2% premium to the market’s FY11 P/E of 13.8x, a multiple that we feel no longer is sufficiently attractive.

SMCB: HOLD on potential increasing threat from SMGR’s new plants. We believe that SMCB’s strong domestic cement sales (+29.8% YoY in 8M11) are unlikely to be sustainable over the next year, with respect to the increasing pressure of product after the completion of SMGR's new plants. At the moment, the counter only warrants a HOLD rating because of the limited upside potential that it offers to our TP of Rp2,200 and the unjustified premium multiple of 15.9x FY11 P/E.

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