Company Update:
Semen Indonesia (SMGR IJ, Neutral, TP: IDR9,000),
EBIT Margin Likely To Narrow Further
Semen Indonesia (SMGR IJ, Neutral, TP: IDR9,000),
EBIT Margin Likely To Narrow Further
We
expect cement demand to pick up in 2H16, but the national overcapacity to
continue. Given the high unutilised production capacity rate, new players are
selling cement at huge discounts. Thus, Semen Indonesia is likely to further
cut its selling price, which would lead to a narrower EBIT margin. To boost
earnings, it is focusing on cost efficiency and boosting sales volume by
growing its domestic and regional markets. Due to the lower EBIT margin, we cut
our earnings estimates. Maintain NEUTRAL, with a DCF-based IDR9,000 TP (from
IDR10,000, 1% downside).
¨
Overcapacity
to rise. We
expect national demand for cement to increase in 2H16, driven by an increase in
government spending on infrastructure projects. Also, a lower benchmark
interest rate and the relaxation of mortgage policies should boost property
sales – which would lift demand for cement. However, new cement makers have
aggressively built new cement plants, which led to the nationwide overcapacity.
We expect the utilised production capacity rate to decline to 71% in FY16F
(from 74% in FY15) in which unutilised capacity could increase to 26m tonnes pa
from 22m tonnes pa in the same period.
¨
Lower
selling prices to continue. We estimate the capacity utilisation rate of new cement
makers at below 50%, which is much lower than the national average capacity
utilisation rate. The substantial unitised production capacity among new cement
makers caused them to sell cement at huge discounts – ie prices were on par
with Semen Indonesia’s selling price. Semen Indonesia cut its selling price by
7.4% YoY (4% YTD) to maintain its domestic market share. However, this was on
the expense of lower EBIT margin. Semen Indonesia’s EBIT margin declined to
20.5% in 1Q16 (from 23.4% in 1Q15).
¨
Cost
efficiency and regional market expansion. Management said there is still room
to reduce transportation- and energy-related costs which jointly account for
~50% of the company’s cost per tonne. Hence, although its selling price is
lower, its FY16F EBIT margin may be level to that of FY15. To boost sales, in
addition to its domestic expansion, Semen Indonesia aims to increase its
international sales contribution to 15% of revenue (from 6% in 1Q16). Regional
target markets include Vietnam, Cambodia, Laos and Sri Lanka.
¨
Lower
earnings estimates and TP. Given the narrower EBIT margin, we cut our FY16F-17F earning
estimates to IDR4.5trn/5.3trn (-9%/-7%).
Our IDR9,000 TP also reflects 12x/10x
FY16F-17F P/Es. Key upside risks are:
i. Accelerating
infrastructure projects from higher government spending;
ii. Hhigher property
sales, driven by lower benchmark rates.
The main downside risk is national over
capacity situation.
Kindly click the following link for the full report: Semen Indonesia : EBIT Margin Likely To Narrow Further
Best regards,
Andrey Wijaya
Senior Vice President
Research Analyst – Auto,
Consumer, Cement
PT. RHB Securities
Indonesia
