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Wednesday, December 7, 2011

PT Indocement Tunggal Prakarsa Tbk - Hegemony of The King

by Trimegah Securities

Strongest Beneficiaries of Secular ID Growth

INTP, with 86% of its 18.6mn tons capacity located in Java, is the biggest beneficiary of the region’s strong growth. Currently at 86% capacity utilization, which is the lowest among competitors, INTP has the needed capacity to capture a larger portion of growing demand and subsequently push margin and top line growth going forward. Given adequate control over a strong brand and penetration, INTP is on top of customers’ mind for project developments in and around Java.

More Capacity to Come

As INTP lays a stronger foundation to further support growth, the company is currently undertaking installment of additional grinding machine capacity to eliminate bottleneck in production with total investment value of Rp120bn. When completed, the new grinding machines will support production capacity expansion, yielding an additional 2mn tons by 2013. The company is also in the final stages of preparing feasibility studies for two cement factories located in Central Java and Outside Java, with total investment budget of USD700mn.

Capacity Expansion at Low Risk

INTP has on hand Rp5.9tr cash and

INTP - PT Indonesia Tunggal Prakarsa Tbk. cash equivalent, representing 35% of total assets. With average annual operating cash flow of Rp3.5tr, we strongly believe that INTP expansion plans will be matched with its cash generation ability, thereby minimizing balance sheet risk arising from (obligations tied to) expansion activities. Current balance sheet risk is very low with D/E ratio of -0.4x and 741x interest rate coverage ratio, which should provide a large margin of safety in times of financial market volatility.

BUY, TP18250

We put Buy recommendation on INTP as INTP is the most ready cement producer with its lowest utilization rate and well-positioned in Java along with solid balance sheet. Our DCF based target price assumes WACC of 15.3% and LTg of 5.0%, reflects 15.8x 2012 PE.

Key Risks:

Faster growth in outer Java, delay in most Java infra projects.

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