(SMGR IJ) 4Q18 review: Higher operating expenses dampen profitability Cement Company Report (Upgrade) Trading Buy Target Price (12M, IDR) 15,500 Share Price (4/4/19, IDR) 13,850 Expected Return 11.9% Consensus OP (19F, IDRtr) 5.1 EPS Growth (19F, %) 12.9 P/E (19F, x) 23.6 Industry P/E (19F, x) 16.3 Benchmark P/E (19F, x) 15.7 Market Cap (IDRbn) 82,151.6 Shares Outstanding (mn) 5,931.5 Free Float (mn) 2,906.1 Institutional Ownership (%) 67.1 Beta (Adjusted, 24M) 1.3 52-Week Low (IDR) 6,500 52-Week High (IDR) 14,450 (%) 1M 6M 12M Absolute 7.4 55.2 30.0 Relative 7.3 41.9 24.6 (D-3mo=100) 160 140 120 100 80 PT. Basic Industry JCI SMGR 60 4/18 6/18 8/18 10/18 12/18 2/19 4/19 Mimi Halimin +62-21-515-1140 (ext.: 233) mimi.halimin@miraeasset.co.id 4Q18 net profit beats expectations despite weaker QoQ For 4Q18, (SMGR) posted revenue of IDR9.2tr (+27.1% YoY, +13.3% QoQ), in line with our expectation and the consensus. This brought cumulative FY18 revenue to IDR30.7tr (+10.3% YoY), equivalent to 101.7% of our FY18 estimate and 103.7% of the consensus. Revenue from the cement business in 4Q18 grew by 6.8% YoY and 2.4% QoQ to IDR7.4tr, which we believe was mostly driven by volume. Meanwhile, gross profit margin (GPM) improved to 32.4% in the quarter (vs. 31.2% in 3Q18 and 26.3% in 4Q17). Despite QoQ improvement in GPM, operating margin in 4Q18 (17.0%) was sequentially lower (19.5% in 3Q18), mostly due to significant jumps in transportation/handling costs and professional fees. We suspect that higher transportation costs were linked to lower efficiency stemming from the rainy season in 4Q18 and the overdimension and overload (ODOL) regulation (which lifted distribution costs). Despite lower QoQ net profit in 4Q18, however, we think that the company s performance was much better in FY18 than in FY17, thanks to improved ASP and cost efficiency. SMGR booked 4Q18 net profit of IDR991.8bn (+514.8% YoY, - 11.1% QoQ). For full-year FY18, SMGR booked net profit of IDR3.1tr (+90.0% YoY), higher than our estimate (107.6% achievement) and the consensus (123.4% achievement). Despite slow start to the year, we expect better volume growth in 2H19 Looking to 2019, we note that domestic cement consumption got off to a slow start in January-February. Indeed, SMGR s domestic cement sales volume declined by 6.3% YoY in January and inched up by just 1.1% YoY in February. Cumulatively, SMGR s 2M19 domestic volume growth was negative (-3.0% YoY to 4.0mn tonnes). In addition, this year, SMGR is booking additional volume from Solusi Bangun Indonesia (previously known as Holcim Indonesia; SMCB/Not Rated). Although the combined domestic volume growth of SMGR and SMCB has also been slow thus far this year (-0.1% YoY in 2M19), we expect to see a pickup in 2H19. Revising up our net profit estimates SMGR has officially taken over 80.64% ownership in SMCB (as of January 31, 2019) and is currently in the process of acquiring the remaining 19.36% via a mandatory tender offer (March 12th-April 10th). We expect this consolidation to benefit SMGR through cost efficiency enhancement. Against this backdrop, we revised up our 2019F and 2020F net profit estimates by 13.4% and 22.9% due to higher margin expectations. We expect SMGR s net profit to grow by 12.9% in 2019, lagging far behind 2019F estimated revenue growth (+36.5% YoY) on a jump in interest expenses owing to higher debt. We note that SMGR is using debt to fund the acquisition (a facility agreement with a loan value of up to USD1,282mn). Upgrade recommendation from Hold to Trading Buy with TP of IDR15,500 We upgrade our recommendation on SMGR to Trading Buy with a target price of IDR15,500. We believe that the consolidation will have a positive impact on SMGR in the future. Risks to our call include lower-than-expected demand and higher-thanexpected coal prices. FY (Dec.) 12/16 12/17 12/18 12/19F 12/20F Revenue (IDRbn) 26,134 27,814 30,688 41,898 45,820 Operating profit (IDRbn) 4,973 2,633 4,773 6,819 8,211 Net Profit (IDRbn) 4,522 1,621 3,079 3,477 4,596 EPS (IDR) 762 273 519 586 775 BPS (IDR) 4,895 4,809 5,259 5,637 6,178 P/E (x) 18.2 50.7 26.7 23.6 17.9 P/B (x) 2.8 2.9 2.6 2.5 2.2 EV/EBITDA (x) 12.1 20.1 13.6 11.0 9.4 ROE (%) 15.6% 5.7% 9.9% 10.4% 12.5% ROA (%) 10.2% 3.3% 6.0% 4.6% 5.8% Dividend Yield (%) 2.2% 1.0% 1.5% 1.7% 2.2% Net gearing (x) 11.8% 22.3% 14.7% 71.1% 63.2% Note: Net profit refers to net profit attributable to controlling interests Source: Company data, Research PLEASE SEE ANALYST CERTIFICATIONS AND IMPORTANT DISCLOSURES & DISCLAIMERS IN APPENDIX 1 AT THE END OF REPORT.
Table 1. SMGR s FY18 results (IDRbn) 4Q17 3Q18 4Q18 YoY QoQ FY17 FY18 YoY Revenue 7,262 8,147 9,232 27.1% 13.3% 27,814 30,688 10.3% COGS 5,351 5,606 6,241 16.6% 11.3% 19,854 21,357 7.6% Gross profit 1,911 2,541 2,991 56.5% 17.7% 7,960 9,331 17.2% Operating profit 311 1,586 1,568 404.8% -1.1% 2,633 4,773 81.3% Pre-tax profit 252 1,426 1,361 440.6% -4.5% 2,254 4,105 82.1% Net profit 161 1,116 992 514.8% -11.1% 1,621 3,079 90.0% 4Q17 3Q18 4Q18 FY17 FY18 Gross margin 26.3% 31.2% 32.4% 28.6% 30.4% Op. margin 4.3% 19.5% 17.0% 9.5% 15.6% Net margin 2.2% 13.7% 10.7% 5.8% 10.0% Note: NP refers to net profit attributable to controlling interests. Source: Company data, Research Table 2. SMGR s actual performance vs. forecasts FY18 (F) FY18 (F) FY18 (A) FY18 (A) vs. FY18 (F) FY (Dec.) Mirae Consensus Actual Mirae Consensus Revenue (IDRbn) 30,171 29,594 30,688 102% 104% Pre-tax profit (IDRbn) 3,754 3,285 4,105 109% 125% NP (IDRbn) 2,862 2,495 3,079 108% 123% Note: NP refers to net profit attributable to controlling interests. Source: Company data, Bloomberg, Research estimates Table 3. Earnings forecast revisions. FY (Dec.) 12/19 (Old) 12/19 (New) % change 12/20 (Old) 12/20 (New) % change Revenue (IDRbn) 41,880 41,898 0.0% 45,790 45,820 0.1% Gross profit (IDRbn) 12,304 13,558 10.2% 14,011 15,737 12.3% NP (IDRbn) 3,067 3,477 13.4% 3,738 4,596 22.9% Note: NP refers to net profit attributable to controlling interests. Source: Company data, Research estimates Figure 1. SMGR s historical 2M domestic cement sales volume Figure 2. Sales volume in 2M19 (mn tonnes) 4.2 4.13 4.1 4.04 4.0 3.97 4.00 3.9 3.8 2M16 2M17 2M18 2M19 Source: Company data, ASI, Research Source: Company data, ASI, Research 2
(SMGR/Trading Buy/TP IDR15,500) Income Statement (Summarized) Statement of Financial Condition (Summarized) (IDRbn) 12/17 12/18 12/19F 12/20F (IDRbn) 12/17 12/18 12/19F 12/20F Revenue 27,814 30,688 41,898 45,820 Cash 3,666 5,277 5,051 5,257 Cost of Goods Sold 19,854 21,357 28,340 30,083 Trade Receivables 4,886 5,786 7,461 8,160 Gross Profit 7,960 9,331 13,558 15,737 Inventories 3,686 3,544 4,969 5,275 Operating Expenses 5,326 4,557 6,739 7,527 Other CA 1,563 1,400 1,642 1,795 Operating Profit 2,633 4,773 6,819 8,211 PPE 32,523 32,749 50,440 52,431 Pretax Profit 2,254 4,105 4,524 5,978 Other Non-CA 2,744 2,399 6,518 6,847 Income Tax 604 1,019 1,041 1,375 Total Assets 49,069 51,156 76,081 79,765 Non-Controlling Interest 29 7 7 7 Trade Payables 4,927 4,476 6,212 6,594 Net Profit 1,621 3,079 3,477 4,596 ST loans + CPLTD 1,921 1,724 2,204 20,278 Total CL 8,804 8,203 11,330 29,988 Profitability ratio Long-term debt 8,099 8,140 26,628 8,155 Gross Profit Margin 28.6% 30.4% 32.4% 34.3% Total Liabilities 19,023 18,420 41,100 41,578 Operating Profit Margin 9.5% 15.6% 16.3% 17.9% Common Stock 593 593 593 593 Net Profit Margin 5.8% 10.0% 8.3% 10.0% Paid in Capital 1,458 1,458 1,458 1,458 Return on Equity 5.7% 9.9% 10.4% 12.5% Retained Earnings 26,340 28,614 30,859 34,064 Return on Asset 3.3% 6.0% 4.6% 5.8% Non-Controlling interest 1,524 1,544 1,544 1,544 Equity (ex minority) 28,522 31,192 33,437 36,643 Cash Flow (Summarized) Forecasts/ Valuations (Summarized) (IDRbn) 12/17 12/18 12/19F 12/20F 12/17 12/18 12/19F 12/20F Operating Cash Flow P/E (x) 50.7 26.7 23.6 17.9 Net income 1,621 3,079 3,477 4,596 P/B (x) 2.9 2.6 2.5 2.2 Depreciation 1,775 1,597 2,809 3,009 EV/EBITDA (x) 20.1 13.6 11.0 9.4 Changes in operating accounts EPS (IDR) 273 519 586 775 in trade receivables 1,048 901 1,675 698 BPS (IDR) 4,809 5,259 5,637 6,178 in inventories 1,015-142 1,425 306 DPS (IDR) 136 208 234 310 in others CA 548-163 241 154 Payout ratio (%) 49.7% 40.0% 40.0% 40.0% in trade payable 849-451 1,735 382 Dividend Yield (%) 1.0% 1.5% 1.7% 2.2% in accrued expense -47 271 15 16 Revenue growth (%) 6.4% 10.3% 36.5% 9.4% in others CL -260-224 896 187 GP growth (%) -19.2% 17.2% 45.3% 16.1% CFO 1,438 3,480 6,071 25,105 OP growth (%) -47.1% 81.3% 42.9% 20.4% EBITDA growth (%) -37.8% 44.5% 51.1% 16.5% Investing Cash Flow NP growth (%) -64.1% 90.0% 12.9% 32.2% in PPE 3,452 1,823 20,499 5,000 AR turnover (x) 6.4 5.8 5.6 5.6 Invt. turnover (x) 6.2 5.9 5.7 5.7 CFI -3,188-1,479-24,618-5,329 AP turnover (x) 4.4 4.5 4.6 4.6 Financing Cash Flow ROA (%) 3.3% 6.0% 4.6% 5.8% in other liability 1,069-44 1,065 294 ROE (%) 5.7% 9.9% 10.4% 12.5% in equity 2,134 409 1,232 1,391 Gearing in minority interest -15 20 0 0 Total debt (IDRbn) 10,019 9,864 28,833 28,433 CFF 2,569-391 18,321-19,570 Debt/equity (%) 35.1% 31.6% 86.2% 77.6% Net cash 818 1,611-226 206 Net debt (IDRbn) 6,353 4,587 23,781 23,176 beginning balance 2,848 3,666 5,277 5,051 Net debt/equity (%) 22.3% 14.7% 71.1% 63.2% ending balance 3,666 5,277 5,051 5,257 Source: Company, Research estimates 3
4
APPENDIX 1 Important Disclosures & Disclaimers Disclosures As of the publication date, PT., and/or its affiliates do not have any special interest with the subject company and do not own 1% or more of the subject company's shares outstanding. Stock Ratings Industry Ratings Buy Relative performance of 20% or greater Overweight Fundamentals are favorable or improving Trading Buy Relative performance of 10% or greater, but with volatility Neutral Fundamentals are steady without any material changes Hold Relative performance of -10% and 10% Underweight Fundamentals are unfavorable or worsening Sell Relative performance of -10% * Our investment rating is a guide to the relative return of the stock versus the market over the next 12 months. * Although it is not part of the official ratings at, we may call a trading opportunity in case there is a technical or short-term material development. * The target price was determined by the research analyst through valuation methods discussed in this report, in part based on the analyst s estimate of future earnings. The achievement of the target price may be impeded by risks related to the subject securities and companies, as well as general market and economic conditions. Analyst Certification Opinions expressed in this publication about the subject securities and companies accurately reflect the personal views of the Analysts primarily responsible for this report. PT. ( Mirae Asset Daewoo ) policy prohibits its Analysts and members of their households from owning securities of any company in the Analyst s area of coverage, and the Analysts do not serve as an officer, director or advisory board member of the subject companies. Except as otherwise specified herein, the Analysts have not received any compensation or any other benefits from the subject companies in the past 12 months and have not been promised the same in connection with this report. No part of the compensation of the Analysts was, is, or will be directly or indirectly related to the specific recommendations or views contained in this report but, like all employees of Mirae Asset Daewoo, the Analysts receive compensation that is determined by overall firm profitability, which includes revenues from, among other business units, the institutional equities, investment banking, proprietary trading and private client division. At the time of publication of this report, the Analysts do not know or have reason to know of any actual, material conflict of interest of the Analyst or Mirae Asset Daewoo except as otherwise stated herein. Disclaimers This report is published by Mirae Asset Daewoo, a broker-dealer registered in the Republic of Indonesia and a member of the Indonesia Stock Exchange. Information and opinions contained herein have been compiled in good faith and from sources believed to be reliable, but such information has not been independently verified and Mirae Asset Daewoo makes no guarantee, representation or warranty, express or implied, as to the fairness, accuracy, completeness or correctness of the information and opinions contained herein or of any translation into English from the Indonesian language. In case of an English translation of a report prepared in the Indonesian language, the original Indonesian language report may have been made available to investors in advance of this report. The intended recipients of this report are sophisticated institutional investors who have substantial knowledge of the local business environment, its common practices, laws and accounting principles and no person whose receipt or use of this report would violate any laws and regulations or subject Mirae Asset Daewoo and its affiliates to registration or licensing requirements in any jurisdiction shall receive or make any use hereof. This report is for general information purposes only and it is not and shall not be construed as an offer or a solicitation of an offer to effect transactions in any securities or other financial instruments. The report does not constitute investment advice to any person and such person shall not be treated as a client of Mirae Asset Daewoo by virtue of receiving this report. This report does not take into account the particular investment objectives, financial situations, or needs of individual clients. The report is not to be relied upon in substitution for the exercise of independent judgment. Information and opinions contained herein are as of the date hereof and are subject to change without notice. The price and value of the investments referred to in this report and the income from them may depreciate or appreciate, and investors may incur losses on investments. Past performance is not a guide to future performance. Future returns are not guaranteed, and a loss of original capital may occur. Mirae Asset Daewoo, its affiliates and their directors, officers, employees and agents do not accept any liability for any loss arising out of the use hereof. Mirae Asset Daewoo may have issued other reports that are inconsistent with, and reach different conclusions from, the opinions presented in this report. The reports may reflect different assumptions, views and analytical methods of the analysts who prepared them. Mirae Asset Daewoo may make investment decisions that are inconsistent with the opinions and views expressed in this research report. Mirae Asset Daewoo, its affiliates and their directors, officers, employees and agents may have long or short positions in any of the subject securities at any time and may make a purchase or sale, or offer to make a purchase or sale, of any such securities or other financial instruments from time to time in the open market or otherwise, in each case either as principals or agents. Mirae Asset Daewoo and its affiliates may have had, or may be expecting to enter into, business relationships with the subject companies to provide investment banking, market-making or other financial services as are permitted under applicable laws and regulations. No part of this document may be copied or reproduced in any manner or form or redistributed or published, in whole or in part, without the prior written consent of Mirae Asset Daewoo. 5
Distribution United Kingdom: This report is being distributed by Mirae Asset Securities (UK) Ltd. in the United Kingdom only to (i) investment professionals falling within Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (the Order ), and (ii) high net worth companies and other persons to whom it may lawfully be communicated, falling within Article 49(2)(A) to (E) of the Order (all such persons together being referred to as Relevant Persons ). This report is directed only at Relevant Persons. Any person who is not a Relevant Person should not act or rely on this report or any of its contents. United States: This report is distributed in the U.S. by Mirae Asset Securities (USA) Inc., a member of FINRA/SIPC, and is only intended for major institutional investors as defined in Rule 15a-6(b)(4) under the U.S. Securities Exchange Act of 1934. All U.S. persons that receive this document by their acceptance thereof represent and warrant that they are a major institutional investor and have not received this report under any express or implied understanding that they will direct commission income to Mirae Asset Daewoo or its affiliates. Any U.S. recipient of this document wishing to effect a transaction in any securities discussed herein should contact and place orders with Mirae Asset Securities (USA) Inc., which accepts responsibility for the contents of this report in the U.S. The securities described in this report may not have been registered under the U.S. Securities Act of 1933, as amended, and, in such case, may not be offered or sold in the U.S. or to U.S. persons absent registration or an applicable exemption from the registration requirements. Hong Kong: This document has been approved for distribution in Hong Kong by Mirae Asset Securities (HK) Ltd., which is regulated by the Hong Kong Securities and Futures Commission. The contents of this report have not been reviewed by any regulatory authority in Hong Kong. This report is for distribution only to professional investors within the meaning of Part I of Schedule 1 to the Securities and Futures Ordinance of Hong Kong (Cap. 571, Laws of Hong Kong) and any rules made thereunder and may not be redistributed in whole or in part in Hong Kong to any person. All Other Jurisdictions: Customers in all other countries who wish to effect a transaction in any securities referenced in this report should contact Mirae Asset Daewoo or its affiliates only if distribution to or use by such customer of this report would not violate applicable laws and regulations and not subject Mirae Asset Daewoo and its affiliates to any registration or licensing requirement within such jurisdiction. Mirae Asset Daewoo International Network Mirae Asset Daewoo Co., Ltd. (Seoul) Mirae Asset Securities (HK) Ltd. Mirae Asset Securities (UK) Ltd. Global Equity Sales Team Mirae Asset Center 1 Building 26 Eulji-ro 5-gil, Jung-gu, Seoul 04539 Korea Suites 1109-1114, 11th Floor Two International Finance Centre 8 Finance Street, Central Hong Kong 41st Floor, Tower 42 25 Old Broad Street, London EC2N 1HQ United Kingdom Tel: 82-2-3774-2124 Tel: 852-2845-6332 Tel: 44-20-7982-8000 Mirae Asset Securities (USA) Inc. Mirae Asset Wealth Management (USA) Inc. Mirae Asset Wealth Management (Brazil) CCTVM 810 Seventh Avenue, 37th Floor New York, NY 10019 USA 555 S. Flower Street, Suite 4410, Los Angeles, California 90071 USA Rua Funchal, 418, 18th Floor, E-Tower Building Vila Olimpia Sao Paulo - SP 04551-060 Brasil Tel: 1-212-407-1000 Tel: 1-213-262-3807 Tel: 55-11-2789-2100 PT. Mirae Asset Securities (Singapore) Pte. Ltd. Mirae Asset Securities (Vietnam) LLC Equity Tower Building Lt. 50 Sudirman Central Business District Jl. Jend. Sudirman, Kav. 52-53 Jakarta Selatan 12190 6 Battery Road, #11-01 Singapore 049909 Republic of Singapore 7F, Saigon Royal Building 91 Pasteur St. District 1, Ben Nghe Ward, Ho Chi Minh City Vietnam Indonesia Tel: 62-21-515-3281 Tel: 65-6671-9845 Tel: 84-8-3911-0633 (ext.110) Mirae Asset Securities Mongolia UTsK LLC Mirae Asset Investment Advisory (Beijing) Co., Ltd Beijing Representative Office #406, Blue Sky Tower, Peace Avenue 17 1 Khoroo, Sukhbaatar District Ulaanbaatar 14240 Mongolia 2401B, 24th Floor, East Tower, Twin Towers B12 Jianguomenwai Avenue, Chaoyang District Beijing 100022 2401A, 24th Floor, East Tower, Twin Towers B12 Jianguomenwai Avenue, Chaoyang District Beijing 100022 Tel: 976-7011-0806 Tel: 86-10-6567-9699 Tel: 86-10-6567-9699 (ext. 3300) Shanghai Representative Office 38T31, 38F, Shanghai World Financial Center 100 Century Avenue, Pudong New Area Shanghai 200120 Ho Chi Minh Representative Office 7F, Saigon Royal Building 91 Pasteur St. District 1, Ben Nghe Ward, Ho Chi Minh City Vietnam Tel: 86-21-5013-6392 Tel: 84-8-3910-7715 6