RHB Indonesia Morning Cuppa - 12 March 2018 (Coal Mining, Sri Rejeki Isman, News)

Indonesia Morning Cuppa

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Sector Update

Coal Mining

Domestic Power Plant Ceiling Coal Price Set

MEMR has issued a ministry decree that regulates the selling prices of coal with CV of 6,322kcal/kg GAR to domestic coal power plants. This sets the ceiling at USD70.00/tonne. To factor in the impact of the decree, we cut FY18F earnings for Adaro Energy by ~14%, Bukit Asam by ~7% and Harum Energy by ~14%. We think this decree only benefits the coal mining contractors, as the ministry now allows coal miners that comply with the decree to increase their original coal production plans by 10%. We also think the recent coal counters sell-off has been overdone, and maintain our OVERWEIGHT call on the on sector.

Analyst: Hariyanto Wijaya, CFA, CFP, CA, CPA (Aust.), CFTe, CMT (6221) 2970 7061

Link to report: will be sent out later

Morning Cuppa Full Report: Indonesia Morning Cuppa 120318

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Sri Rejeki Isman

Key highlights of our meeting are as follow:

Sri Rejeki Isman (SRIL IJ, NR), a vertically integrated textile & garment company, with business segments ranging from spinning, weaving, finishing, and garment manufacturing, with operations located in Central Java.

The company acquires Bitratex Industries and Primayudha Mandiri Jaya, two spinning companies located in Central Java, and will be finalized by the end of March 2018. The company aims to acquire new customers acquired already by these two companies and to boost cost efficiency, especially in raw materials cost. Further, this acquisition could boost Sri Rejeki’s revenue by 20%, therefore the company is confident to achieve 30% YoY top line growth target in FY18.

Sri Rejeki’s all production facilities are located in Semarang and Boyolali, Central Java, a close proximity among each production facility, therefore reducing company’s transportation cost. Further, Boyolali has low minimum wage policy (IDR1.6m/mo) and skilled workforce compared to other cities in Java. With cost efficiency and consistent high-quality products, Sri Rejeki has been able to offer competitive pricing policies to consumers.

Exports sales contributed the most to Sri Rejeki sales, contributing around 54% of total Sri Rejeki’s exports sales, whereas domestic sales contributed around 46% of the total sales in FY17. Further, looking from its business segment, spinning contributed the most to the company’s revenue, representing 38% of the total revenue in 9M17, followed by finishing, garment, and weaving segment. Using rough estimates according to the management, Sri Rejeki’s spinning segment dominates 10% of spinning market share in Indonesia.

Although spinning segment contributed the most to the company’s total revenue, its margin is relatively small compared to garment segment. Spinning segment generates only 10-15% gross profit margin while garment segment could generate 20-30% GPM. Further, the company expects to have strong garment segment growth by FY18 on account to its increasing capacity of garment production from 27m pieces/year in FY17 to 30m pieces/year in FY18.

Currently, company has maximum utilisation rate for spinning and garments segment, operating around 90% utilisation rate. Meanwhile for weaving and finishing segment has 65% utilisation rate.

85% of the total company costs came from its raw materials, meaning changes in raw materials could significantly impact the company’s margin. Currently, the company imports 40% of its total raw material costs and the remaining 60% came from local production. To minimise currency risk generated from imported goods, the company plans to gradually decrease its imported goods and plans to shift more to local production.

Management targets 30% YoY revenue growth, gross profit margin around 15-18%, and 25% YoY gross profit margin growth in FY18. Sri Rejeki is now trading at4.76x PE. Based on consensus estimates, the company is trading around 5.07-5.61x FY18-19F EV/EBITDA.

Analyst: Andrey Wijaya (6221) 2970 7058

Morning Cuppa Full Report: Indonesia Morning Cuppa 120318

Today’s News

Indonesia projected to lead in global nickel production

Adhi Karya’s subsidiaries to go public

Samudera Indonesia operates new ship

XL Axiata plans to refinance its debt

Medco spent USD12.96m for exploration in 2M18

Ramayana to allocate IDR175bn for three new outlet openings

Timah to boost capital expenditure by 240% in FY18

National motorcycle sales decreases by 3.1% in February 2018

PGN officially becomes subsidiary of Pertamina

Top BUYs
		TP	Upside	Catalysts
		(IDR)	(%)	Catalysts
Astra International		9,500	13	Given the robust of the All New Toyota Rush and Daihatsu Terios sales orders, Astra has raised its monthly sales target. Its lowering of Daihatsu Terios’ selling price while positioning Toyota Rush at a higher class are seen as a good strategy to reclaim market share. We also see the company’s coal mining unit benefiting from higher coal prices. We raise its earnings estimates, and SOP-based TP to IDR9,500 (from IDR9,200, 13% upside), implying 16-15x FY18F-19F P/Es. Key risk is the intense competition in the auto industry. SAIC-GM Wuling just launched its 1.8-litre MPV – Wuling Cortez – with an attractive selling price. Maintain BUY.
BSD City		2,650	44	Expectations of higher marketing sales due to lower interest rates, which ought to incentivise mortgage users. BSD City has the largest proportion of mortgage users vis-à-vis other developers. There is also better monetisation from its large landbank.
Bukit Asam		4,100	20	Bukit Asam is the cheapest coal counter in our coal universe. We think earnings growth should be the catalyst for its share price. We believe investors’ concerns about a potential cost-plus margins formula in determining coal selling prices to domestic power plants should fade. This is based on our checks with several competent sources. The formula is only valid for coal sales to new mine mouth power plants. It is not for existing/under construction mine mouth power facilities.
Indofood Sukses Makmur		10,300	28	We expect higher domestic consumer spending in 2018. This would be thanks to the Government stimulus initiatives for low-end consumers. Indofood Sukses Makmur, as one of the largest food & beverage (F&B) players, should benefit from this situation. F&B accounted for around 62% of its total 9M17 EBIT. Higher flour prices may also boost Bogasari Flour Mills’ earnings, which accounted for around 14% of the company’s EBIT.
	Ramayana Lestari	1,550	34	Consumer spending recovery – especially from the lower income segment in 2018 – is likely to benefit Ramayana Lestari after a flat performance in 2017. This is due to increased subsidies by the Government that have been allocated in the 2018 budget via the Ministry of Social Affairs. In addition, President Joko Widodo’s (Jokowi) work-for-cash programme is likely to help raise consumer spending.