Refer to Important disclosures in the last of this report
StockDataTarget price (Rp) Rp11,500
Prior TP (Rp) Rp10,350
Shareprice (Rp) Rp10,300
Upside/downside (%) +11.1
Sharesoutstanding (m) 5,932
Marketcap. (US$ m) 4,247
52whigh/low (Rp) 11,750 - 6,725
Major Shareholders
PT Indo Premier Sekuritas willy.goutama@ipc.co.id +62 21 5793 1168
Consolidation recuperates ailing industry
SMGR will raise market share to 54% (from 39%) post acquisition.
Industry consolidation should sooth a price war and cement glut.
The cost of long run efficiency is a short run financial leverage.
EV/ton calculation suggests SMCB’s acquisition is a good deal.
SMGR catches substantial market share. The acquisition of Lafarge Holcim’s stake (80.6%) in Holcim Indonesia (SMCB) by Semen Indonesia (SMGR) solidifies SMGR’s position as Indonesia cement market leader. We herein assume that no shifting in consumer preferences for both SMCB and SMGR’s product. The combined company will establish market shares of over 40% in two domestic cement key markets of Java (SMGR: 27%, SMCB: 17%) and Sumatera (SMGR: 29%, SMCB: 20%) which represented 78% of Indonesia’s overall cement market. SMGR will also challenge Indocement (INTP; Hold) in which its combined share in W. Java & C. Java will rise to 32% and 60%, respectively (INTP: 52% & 34%), INTP’s two key home market region for which have also attracted new entrants (eg. China-based cement producers).
SMGR poised to control both of pricing and supply. We argue the dominant domestic presence of SMGR (with market share topped c.50%) post acquisition brings two positive catalyst. First, we expect an enhancement of SMGR’s pricing power; SMGR alone was capable of leading an upward adjustment (3Q18: +50% qoq, 100% yoy) to its ASP (fig.1) which explains its good 3Q18 sales performance (+22% qoq, 4% yoy), though also coupled with strong volume recovery (+40% qoq, 5% yoy). Meanwhile, SMCB also exhibited a less volatile and higher quarterly ASP trend (fig.2) over the last ten quarters as it serves a more clustered market (W. Java, E. Java, and N. Sumatera). In sum, we positively view the ability of SMGR post acquisition to institute price adjustments on two key regions, Java and Sumatera. Second, we argue that the surfeit of supply eases as SMGR is about to control 43% of national production capacity (SMGR and SMCB at 33.5mton and 15mton) whose move profoundly affect the overall supply growth.
Efficiency should emerge in long run. We also highlight that holistic operational reach results to SMGR’s cash cost of Rp832k/ton which gauged 5%/51%/76% higher to SMCB/INTP/SMBR’s cash costs. We believe this acquisition will enable SMGR to gradually pin down cash cost as the result of improved economics of scale (better utilization and lower clinker/cement ratio to c.70-75%) and lower logistical costs as SMGR & SMCB can efficiently complement their vast networks (fig. 3) in the long run. Though, a $1.28bn (or Rp19.2tn) worth of loan to finance this acquisition will add an additional interest expenses of Rp570bn (18% of 9M18 EBIT) by applying current cost of joint financing of 2.8% and will reduce 9M18 net income by 20% to Rp1.6tn (pro-forma), we also expect higher D/E FY18F ratio of 1.1x (9M18: 0.6x).
Valuations. The disposal of entire shareholding of Lafarge Holcim in SMCB valued at $1.75bn translates to EV/ton of $117 that implies 9% premium to current SMCB EV/ton of $107, 16% and 36% discount to SMGR EV/ton of $140 and INTP EV/ton of $182. The risk to the transaction is regulatory approval from KPPU. We maintain our BUY rating albeit with higher TP of Rp11,500 due to the valuation base year roll over to 2019.
Semen Indonesia
(
SMGR IJ
)
Source: SMGR, IndoPremier Share Price Closing as of : 15 November 2018
SMGR Company Update
2
Refer to Important disclosures on the last of this report
Fig. 1: SMGR alone is capable of leading price recovery Fig. 2: More clustered player exhibit less volatile ASP
Source: Indopremier, SMGR Source: Indopremier, SMGR, SMCB
Fig. 3: Cement factory map in Indonesia Fig. 4: EV/ton reveals SMCB priced at discount
Source: Indopremier, ASI Source: Indopremier, Lafargeholcim, SMCB, SMBR, INTP, SMGR
Fig. 5: West Java market share in Fig. 6: East Java market share
Source:Indopremier,ASI Source: Indopremier,ASI
-Sales Volume (kton) Blended Domestic ASP
-1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 1Q18 2Q18
SMGR Blended ASP SMCB Blended ASP
-SMGR INTP SMBR SMCB Others
43%
34% 17%
5%
3
Refer to Important disclosures on the last of this report
Year To 31 Dec (RpBn) 2016A 2017A 2018F 2019F 2020F
Income Statement
Net Revenue 26,134 27,814 26,027 28,430 30,938
Cost of Sales (16,278) (19,854) (16,935) (18,525) (20,173)
Gross Profit 9,856 7,960 9,092 9,905 10,765
SG&A Expenses (4,882) (4,834) (5,671) (6,286) (7,001)
Operating Profit 4,973 3,126 3,421 3,619 3,765
Net Interest (180) (588) 67 195 338
Forex Gain (Loss) 0 0 0 0 0
Others-Net 291 208 0 0 0
Pre-Tax Income 5,085 2,747 3,488 3,815 4,102
Income Tax (550) (704) (893) (977) (1,051)
Minorities (13) (29) (32) (35) (39)
Net Income 4,522 2,014 2,563 2,802 3,013
Balance Sheet
Cash & Equivalent 2,862 3,666 4,153 5,359 7,886
Receivable 4,018 4,995 4,002 4,371 4,757
Inventory 2,671 3,686 2,660 2,906 3,162
Other Current Assets 822 1,454 466 479 493
Total Current Assets 10,373 13,802 11,280 13,115 16,298
Fixed Assets - Net 30,847 32,523 29,367 28,561 27,670
Goodwill 1,355 1,270 1,195 1,115 1,035
Non Current Assets 1,280 1,169 939 963 0
Total Assets 44,227 48,963 43,126 44,122 45,396
ST Loans 819 1,193 0 0 0
Payable 4,078 4,927 0 4,436 4,827
Other Payables 2,263 1,956 2,262 2,564 2,907
Current Portion of LT Loans 992 727 691 657 624
Total Current Liab. 8,152 8,804 7,014 7,657 8,359
Long Term Loans 4,450 5,105 1,105 0 0
Other LT Liab. 1,051 1,622 0 0 0
Total Liabilities 13,652 15,531 8,119 7,657 8,359
Equity 2,507 2,182 2,051 2,051 2,051
Retained Earnings 26,528 26,733 28,511 30,032 31,644
Minority Interest 1,539 1,524 1,600 1,680 1,764
Total SHE + Minority Int. 30,574 30,439 32,163 33,764 35,459
Total Liabilities & Equity 44,227 45,970 40,282 41,421 43,818
SMGR Company Update
4
Refer to Important disclosures on the last of this report
Year to 31 Dec 2016A 2017A 2018F 2019F 2020F
Cash Flow
Net Income (Excl.Extraordinary&Min.Int) 4,535 2,043 2,595 2,837 3,052
Depr. & Amortization 2,111 1,775 2,127 2,078 2,163
Changes in Working Capital (801) (618) 1,197 (145) (152)
Others 1,422 (28) (777) (89) (206)
Cash Flow From Operating 7,267 3,172 5,142 4,682 4,857
Capital Expenditure (8,602) (3,256) 1,334 (1,216) (229)
Others 328 340 199 243 338
Cash Flow From Investing (8,274) (2,916) 1,533 (974) 109
Loans 2,418 765 (5,229) (1,140) (33)
Equity 0 0 0 0 0
Dividends (2,261) (2,261) (1,007) (1,281) (1,401)
Others (603) (944) (529) 33 84
Cash Flow From Financing (446) (2,440) (6,765) (2,389) (1,350)
Changes in Cash (1,452) (2,184) (90) 1,319 3,616
FinancialRatios
Gross Margin (%) 37.7 28.6 34.9 34.8 34.8
Operating Margin (%) 19.0 11.2 13.1 12.7 12.2
Pre-Tax Margin (%) 19.5 9.9 13.4 13.4 13.3
Net Margin (%) 17.3 7.2 9.8 9.9 9.7
ROA (%) 11.0 4.3 5.6 6.4 6.7
ROE (%) 15.6 6.6 8.2 8.5 8.7
ROIC (%) 14.4 6.1 8.1 9.4 10.0
Acct. Receivables TO (days) 51.5 57.2 61.1 51.3 51.4
Acct. Receivables - Other TO (days) 1.9 1.9 2.0 2.4 2.4
Inventory TO (days) 6.4 6.2 5.3 6.7 6.6
Payable TO (days) 88.1 82.8 96.9 83.7 83.8
Acct. Payables - Other TO (days) 5.6 5.8 6.8 6.3 6.3
Debt to Equity (%) 20.5 23.1 5.6 1.9 1.8
Interest Coverage Ratio (x) 0.1 0.2 0.0 0.0 0.0
Net Gearing (%) 11.1 11.0 (7.3) (13.9) (20.5)
Head Office
PT INDO PREMIER SEKURITAS
Wisma GKBI 7/F Suite 718
Jl. Jend. Sudirman No.28
Jakarta 10210 - Indonesia
p +62.21.5793.1168
f +62.21.5793.1167
INVESTMENT RATINGS
BUY : Expected total return of 10% or more within a 12-month period HOLD : Expected total return between -10% and 10% within a 12-month period SELL : Expected total return of -10% or worse within a 12-month period
ANALYSTS CERTIFICATION.
The views expressed in this research report accurately reflect the analysts personal views about any and all of the subject securities or issuers; and no part of the research analyst's compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in the report.
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