Tuesday, October 16, 2012

Cement update: September volumes: Back in business

Bahana : Cement

 12 October 2012  Bahana Beacon – Sector flash

§        +43.4% m-m & +34.4% y-y growth: Post August’s slow performance due to the Islamic holidays, the Indonesian Cement Association published outstanding September domestic cement volumes of 5.2mt (+43.4% m-m, +34.4% y-y), translating to 9M12 volumes of 39.5mt (+15.0% y-y), in line with our estimate (73% of our FY12 of 54mt, +13% y-y).  The strong September growth was also backed by solid adjusted daily production of 207k tons/day (+9.0% m-m, +23.6% y-y), the highest this year.

§        Greater volume contribution from Java: September’s robust growth was backed by solid contribution from Java of 2.9mt (+52.4% m-m, +38.7% y-y), coming from Banten (+61.4% m-m, +45.3% y-y) and Jakarta (+61.0% m-m, +51.0% y-y). Separately, Sumatra (+45.2% m-m, +26.8% y-y) and Sulawesi (+42.5% m-m, 37.1% y-y) supported outer Java’s domestic volumes of 2.3mt (+33.3% m-m, +29.2% y-y).

§        INTP outperformed industry: Post INTP’s slow August performance, the company booked strong September domestic volumes of 1.6mt (+56.9% m-m, +36.3% y-y), translating to 9M12 domestic volumes of 12.7mt (+18.8% y-y). On SMGR, volumes were lower than industry growth at 2.1mt (+37.9% m-m, +31.1% y-y), reflecting 9M12 volumes of 15.9mt (+14.1% y-y).  Strong volume growth in Tuban could not offset Tonasa’s additional volume as the commissioning of Tonasa V in September was not booked under revenues but offset against initial production cost.

Outlook: Domestic volumes to remain strong

Despite slower-than-expected monthly domestic volume growth, we retain our positive view on SMGR on its ample capacity on the recent completion of Tuban IV and Tonasa V (commercial production this month) while other producers face capacity constraints. On demand, we expect domestic volume growth of 12.6% in 2012 and 10.8% in 2013, helped by strong marketing sales.  Expected slowdown in 2013 mortgage growth is mainly driven by lower selling prices rather than volumes per se. Scarcity of volumes will result in persistently high cement selling prices, and combined with lower production costs from lower commodity prices, margins should rise ahead.

Rating & valuation: Retain Overweight; Prefer SMGR

With solid cement outlook, we maintain an Overweight in Cement with SMGR as our top pick.  We retain BUY on SMGR (2013 P/E of 15.8x and EPS growth of 18.9%) and HOLD on INTP (2013 P/E of 15.4x and EPS growth of 13.2%).

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