Company update:
Semen Indonesia (SMGR IJ, Neutral, TP: IDR10,200)
Higher Fuel Costs Present a New Headwind
Semen Indonesia (SMGR IJ, Neutral, TP: IDR10,200)
Higher Fuel Costs Present a New Headwind
We
cut our earnings estimates for Semen Indonesia to reflect the increase in fuel
costs that followed the hike in coal prices. It will likely be harder to pass
on the higher costs by increasing selling prices amid the current intense
competition. Despite such headwinds, the company is likely to benefit from
accelerating cement demand growth. The stock is trading at attractive levels,
near -2SD from its forward mean P/E. We trim our DCF-based TP to IDR10,200
(from IDR10,300, 2% upside), which implies 12x FY17F P/E. Maintain NEUTRAL.
¨ Higher price of coal is another headwind. We expect the price
of coal to hike up Semen Indonesia’s production costs, as fuel (ie coal) costs
account for around 26% of its cost of goods manufacturing (COGM). In our
calculation, the average 3Q16 international coal price has increased 28% QoQ to
USD66.30/tonne (2Q16: USD51.70/tonne). Also, the ASP of coal has jumped
to USD88.80/tonne this month. A major part of Semen Indonesia’s coal
purchases are made via purchase contracts, in which selling prices are likely
to be renewed in early October (for 3-month purchase contracts) and January
(for annual and semi-annual purchase contracts).
¨ Likely
not easy to passon higher costs. Competition in Indonesia’s cement industry is
likely to remain intense. Our ground checks at building materials stores
in Jakarta point to continued pricing pressures for cement firms. Semen
Indonesia has lowered its domestic ASP to IDR782,000/tonne (-7% YoY, -2% QoQ).
Meanwhile, new cement players continue to sell cement at high discounted rates.
We expect the unutilised national production capacity to increase to 69% in
FY17F (FY16F: 70%, FY15: 75%). Hence, cement companies may not find it easy to
pass on the cost increase to customers.
¨ However, cement
demand is likely to increase, driven by:
i. Higher property sales on lower mortgage rates
and relaxed LTV rates;
ii. Seasonally high sales at the year-end, in
line with the acceleration in infrastructure projects.
Higher cement demand is a positive catalyst
for cement companies since they should benefit from higher sales volumes.
¨ Reiterate NEUTRAL. Given its lower
earnings estimates, we trim our DCF-based TP to IDR10,200, implying 12x FY17F
P/E. We cut FY16F-17F earnings to IDR4.4trn/5.2trn (-11%/-7%) respectively,
premised on the increase in production costs that resulted from higher coal
prices.
¨ Key
upside risks to our call are higher-than expected infrastructure projects from
better government spending and elevated property sales driven by lower
benchmark rates. The main downside risk is a national overcapacity situation
that pressures selling prices.
Kindly click the following link for the full report: Semen Indonesia : Higher Fuel Costs Presents a New Headwind
Andrey Wijaya
Senior Vice President
Research Analyst – Auto,
Consumer, Cement
PT. RHB Securities Indonesia
