Company update:
Semen Indonesia(SMGR IJ; Neutral; TP: IDR9,800),
Margins Likely To Narrow On Higher Coal Prices
Semen Indonesia(SMGR IJ; Neutral; TP: IDR9,800),
Margins Likely To Narrow On Higher Coal Prices
Semen
Indonesia expects its FY17 sales volume to grow 4-5% YoY, which is slower than
our estimate. Meanwhile, higher coal prices are likely to lift production
costs, while a sales price increase may not be easyamid the current
overcapacity. We cut our earnings estimates, as well as our DCF-based TP to
IDR9,800 (from IDR10,200, 6% upside, 12x FY17F P/E). Although the counter is
trading at a low P/E, it is still not attractive, given strong headwinds. An
upside risk in our call is faster-than-expected property sales on lower
mortgaged rates. Maintain NEUTRAL.
¨ Moderate volume
growth. Although
the expected recovery in property sales and accelerated infrastructure projects
should boost cement demand next year, Semen Indonesia expects national cement
sales to grow by 5% YoY, faster than that of FY16F’s 2-3%. This, however, is
slower than our 7% estimate. In our view, Semen Indonesia is likely to slowly
reduce its selling price – albeit at the expense of sales volume growth, which
may decelerate at a slower pace.
Notably, despite the slower selling price
reduction, the company was able to maintain its market share. Other cement
makers’ market shares have declined. We estimate that its 9M16 ASP declined by
3% YoY, slower than that of its closest peer, Indocement Tunggal (INTP IJ,
NEUTRAL, TP: IDR15,700) whose ASP declined by 11% in the same period.
¨ Competition likely to
remain intense. We
expect the increase in supply to be faster than the growth in demand. We
further anticipate the national utilisation rate (in terms of production) to
decline to 69% FY17F (from 70% in FY16F). Total additional national capacity
would be c.11m tonnes pa in 4Q16-2Q17, while additional national demand may be
only 5m tonnes pain FY17. This situation should intensify competition in the
industry.
¨ Margins may narrow on
higher coal prices. Given
the rising competition, it would not be easy to pass on the higher costs. Our
ground checks suggest that retail selling prices of cement continued declining
in November. However, the average coal price increased to USD65/tonne in FY16F
from USD60/tonne in FY15. We expect the price of coal to increase to
USD75/tonne (+15% YoY) in 2017, which should increase production costs since
coal accounted for around 20% of Semen Indonesia’s 9M16 COGS. In our
sensitivity analysis, its earnings would decline by 6% for every 10% increase
in coal prices.
¨ Paring down numbers. We cut our FY16F-17F
earnings to IDR4.3trn-4.5trn (-3% and -14%) respectively on higher production
costs and lower sales volume.
Our DCF-based TP drops to IDR9,800 from IDR10,200. It also implies as FY17F P/E of 12x. Although Semen Indonesia is trading at low P/Es, at close to-2SD from its average forward rolling P/E mean, we do not think it is an attractive option given strong headwinds in the industry. The summary of risks to our call is on page 3. Reiterate NEUTRAL.
Our DCF-based TP drops to IDR9,800 from IDR10,200. It also implies as FY17F P/E of 12x. Although Semen Indonesia is trading at low P/Es, at close to-2SD from its average forward rolling P/E mean, we do not think it is an attractive option given strong headwinds in the industry. The summary of risks to our call is on page 3. Reiterate NEUTRAL.
Kindly click the following link for the full report: Semen Indonesia: Margin Likely To Narrow On Higher Coal Prices
Andrey Wijaya
Senior Vice President
Research Analyst – Auto,
Consumer, Cement
PT. RHB Securities
Indonesia
