Wednesday, November 16, 2011

Semen Gresik

by Kresna Securities

Investment Thesis

We cut our 12-month TP to Rp10,500 - still with a BUY recommendation, following SMGR’s disappointing 9M11 performance and fierce competition outlook in 2012. Despite still posting a 9.6% YoY net profit increase in 9M11, SMGR shows declining performance on a QoQ basis as limitation in increasing selling prices (due to competition issue) amid increasing costs environment have caused gross margin continued to trim. Sadly, we believe this condition will continue to persist in the next following quarters, hence forces us to tone down our EPS forecast by 7.2% in 2011 and 8.5%/8.7% in 2012/13. Currently, the counter is trading at FY12 P/E of 13.8x (vs INTP 15.5x and SMCB 14.3x), and PEG of 4.2x (vs INTP 4.6x and SMCB 2.0x)

Key Catalysts

· Revenue down on sour sales volume. 3Q11 revenue slid 1.2% QoQ to Rp4.0tr along with declining sales volume of 1.2% QoQ to 4.8m tons while selling prices only increased by a meager 0.4% QoQ to Rp820/kg. Non cement revenue (i.e: cement bags, industrial real estate, blasting service and land rental) also experienced a decline in 3Q11, plunging by 29.4% QoQ to Rp42.2bn.

· Margins under pressure as costs continue to increase. Increasing production cost (+2.0% QoQ) amid flattening selling prices (+0.4% QoQ) have pushed gross margin to the south, declining from 45.7% in 2Q11 to 44.6% in 3Q11, thus resulting gross profit in the quarter to decline by 3.5% QoQ, from Rp1.9tr to Rp1.8tr. Moving down to operating level, significant increase in community development (+171.6% QoQ) and other general and administration expenses (+24.6% QoQ) have increased pressure on the cost side, thus resulting 3Q11 operating profit to fall deeper, down by 7.0 QoQ to Rp1.1tr.

· Declining non operating income and rising taxes add pressure to the bottom line. Non operating income declined by 22.9% QoQ to Rp50.4bn as forex gain of Rp1.0bn in 2Q11 has turned to loss of Rp3.3bn in 3Q11 while other non operating income (net) also plunged by 64.1% QoQ, from Rp12.3bn in 2Q11 to Rp4.4bn in 3Q11. Other pressure also came from the tax side whereas the effective rates have increased from 21.9% in 2Q11 to 25.6% in 3Q11.

Earnings Outlook

· Results below our expectations. 9M11 net profit only achieves 68.4% of our FY11E of Rp4.0tr given underperformance in sales volume (72.3% of FY11E of 19.4m tons), selling prices (-1.3% to FY11E of Rp825/kg), gross margin (-0.6% to FY11E of 46.1%), net interest income (47.4% of FY11E of Rp300.0bn) and effective tax rate (+1.3% to FY11E of 22.0%).

· Cut earnings by 7.2% - 8.7%, downgrade TP to Rp10,500. Aligning the above assumptions in our model, we cut our net profit estimate by 7.2% to Rp3.8tr in 2011, 8.5% to Rp3.9tr in 2012 and 8.7% to Rp4.5tr in 2013; thus resulting lower DCF TP of Rp10,500.

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