4/16 5/16 6/16 7/16 8/16 9/16 10/16 11/16 12/16 1/17 2/17 3/17 (INTP IJ) 1Q17 review: Weaker than expected Basic Industry Company Report May 2, 2017 (Downgrade) Sell (INTP) posted its 1Q17 financial results after the market closed last Friday (4/28). Overall performance was disappointing with net revenue and net profit falling 14.1% YoY and 48.7% YoY, respectively. Profitability margins in gross, operating, and net profit levels slumped down significantly due to weak average selling price (ASP), fierce competition, and higher cost, especially in relation to coal prices. We revise our revenue and cost estimates due to the weaker-than-expected ASP and higherthan-expected cost. We also downgrade our recommendation on INTP from Hold to Sell with a lower target price of IDR13,000 (previous TP: IDR14,600). Target Price (12M, IDR) 13,000 Share Price (4/28/17, IDR) 16,950 Expected Return -23.3% Consensus OP (17F, IDRtr) 4.1 EPS Growth (17F, %) -38.5 P/E (17F, x) 26.2 Industry P/E (17F, x) 17.3 Benchmark P/E (17F, x) 16.2 Market Cap (IDRbn) 62,396.9 Shares Outstanding (mn) 3,681.2 Free Float (mn) 1,803.8 Institutional Ownership (%) 16.0 Beta (Adjusted, 24M) 1.5 52-Week Low (IDR) 14,275 52-Week High (IDR) 20,000 (%) 1M 6M 12M Absolute 4.3 2.9-14.8 Relative 1.7-2.2-32.1 1Q17 review: Disappointing performance with profit margin deterioration INTP s 1Q17 revenue came in at IDR3.4tr (-14.1% YoY; -15.9% QoQ), accounting for 21% and 20% of our and consensus FY17 estimates, respectively. This figure is the weakest first quarter revenue figure since 1Q11 (IDR2.9tr; see Figure 1). The fall in revenue was witnessed in all of INTP s business segments: cement (-13.1% YoY), ready mix concrete (-27.3% YoY), as well as aggregates and trass quarries (-2.8% YoY). We believe INTP s sluggish revenue was dragged by both lethargic volume and price performance during the first quarter. Furthermore, INTP s 1Q17 domestic volume fell 4.2% YoY to 3.8mn tonnes (see Figure 4). This weak volume growth was due to sluggish demand in the company s home market areas, such as West Java, Jakarta, and Banten. Amidst the sluggish demand environment in West Java, competition remained tough, leading its ASP to fall deeper at >5% YoY this quarter. In addition, we believe unfavorable weather condition disturbed cement distribution process and delayed some developing project progress. For cost of goods sold (COGS), the figure came higher-than-expected, resulting in a significantly contracted gross profit margin from 43.2% (1Q16) and 40.0% (4Q16) to only 34.5% (1Q17) (see Figure 5). We ascribe this to rising coal prices (note that fuel and power accounted for 44% of INTP s 1Q17 COGS). Coal prices have been rising since around 3Q16. It was trading at c.usd80-90/mt during 1Q17 (vs. c.usd50/mt during 1Q16; see Figure 6). Despite the decline in revenue, operating expenses (selling, general, and administrative expenses/sg&a) went up 7.2% YoY, leading operating profit to fall 53.7% YoY and margin to deteriorate to only 14.8% (vs. 27.4% in 1Q16). We note that advertising and promotion component in 1Q17 operating cost surged 106.4% YoY, which we suspect was due to INTP s new brand Semen Rajawali and indications of still-tough competition. (D-1yr=100) 125 115 105 95 85 75 65 JCI INTP For the bottom line, 1Q17 net profit slumped 48.7% YoY to only IDR491.6bn, accounting for only 16% and 14% of our and consensus FY17 estimates (vs. c.25% 1Q16 run rate of FY16). Net profit margin fell 9.8%p YoY from 24.4% (1Q16) to only 14.6% (1Q17). PT. Mirae Asset Sekuritas Indonesia Cement Mimi Halimin +62-21-515-1140 (ext.233) mimi.halimin@miraeasset.co.id FY (Dec.) 12/14 12/15 12/16 12/17F 12/18F Revenue (IDRbn) 19,996 17,798 15,362 15,038 16,005 Gross profit (IDRbn) 9,106 7,909 6,331 5,564 6,082 Operating profit (IDRbn) 5,880 5,029 3,618 2,707 3,201 NP (IDRbn) 5,291 4,357 3,870 2,381 2,774 EPS (IDR) 1,437 1,183 1,051 647 754 BPS (IDR) 6,676 6,483 7,101 7,379 7,907 P/E (x) 11.8 14.3 16.1 26.2 22.5 P/B (x) 2.5 2.6 2.4 2.3 2.1 ROE (%) 21.5% 18.3% 14.8% 8.8% 9.5% ROA (%) 18.3% 15.8% 12.8% 7.8% 8.5% Source: Company data, Mirae Asset Sekuritas Indonesia research estimates
Revise our FY17 revenue and cost estimates and downgrade to Sell We cut our FY17 revenue estimate for INTP in the light of its sluggish performance in 1Q17, especially its weak ASP (see Table 3). We also revise up our cost estimate due to the lower-than-expected margins in 1Q17. We downgrade our recommendation on INTP from Hold to Sell with a lower target price of IDR13,000 (previously IDR14,600). Our key concerns on INTP are as follows: a) sluggish performance in 1Q17, b) prolonged stagnation demand in its home market areas, c) continuing fierce competition in West Java amid oversupply, and d) margin deterioration. Risks to our call are: 1) stronger-than-expected property market recovery, especially in West Java, Jakarta and Banten, 2) cement industry consolidation, and 3) government intervention supportive to the property and cement industries. 2
Figure 1. INTP s historical 1Q revenue: 2010-17 Figure 2. INTP s historical quarterly net profit (IDRbn) 5,000 4,500 4,000 3,500 3,000 2,500 2,000 1,500 1,000 500 0 1Q10 1Q11 1Q12 1Q13 1Q14 1Q15 1Q16 1Q17 Source: Company data, (IDRbn) 1,800 1,600 1,400 1,200 1,000 800 600 400 200 0 Source: Company data, Figure 3. INTP s monthly domestic cement sales volume Figure 4. INTP s cumulative domestic cement sales volume (mn tonnes) 2017 2016 (mn tonnes) 1.8 March 17: +0.2% YoY; 4.0 1.6 +14.1% MoM 1.4 4.0 3.9 1.2 3.9 1.0 3.9 0.8 0.6 3.8 0.4 3.8 0.2 0.0 3.7-4.2% 3.8 3.7 3M16 3M17 Source: Company data, ASI, Source: Company data, ASI, Table 1. INTP s 1Q17 financial performance FY (Dec.) 1Q16 4Q16 1Q17 YoY QoQ Revenue (IDRbn) 3,929 4,015 3,376-14.1% -15.9% COGS (IDRbn) 2,230 2,411 2,212-0.8% -8.2% Gross profit (IDRbn) 1,699 1,605 1,164-31.5% -27.5% Gross profit margin (%) 43.2% 40.0% 34.5% Operating profit (IDRbn) - SG&A 1,078 832 499-53.7% -40.0% NP (IDRbn) 958 723 492-48.7% -32.0% NP margin (%) 24.4% 18.0% 14.6% Source: Company data, estimates Table 2. INTP s 1Q17 performance run-rate FY17 (F) FY17 (F) 1Q17 (A) Actual vs. FY17F (%) FY (Dec.) Mirae Consensus Actual Mirae Consensus Revenue (IDRbn) 16,000 16,774 3,376 21% 20% Pretax profit (IDRbn) 4,194 4,568 623 15% 14% NP (IDRbn) 3,145 3,557 492 16% 14% Source: Company data, Bloomberg, estimates 3
Figure 5. INTP s historical gross margin Figure 6. Coal price trend (GPM, %) 50.0% 45.0% 40.0% 34.5% 35.0% 30.0% 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 Source: Company data, (USD/MT) 2017 2016 120 110 100 90 80 70 price difference gap 60 50 40 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Source: Bloomberg, Table 3. Earnings forecast revisions FY (Dec.) 12/17 (Old) 12/17 (New) 12/18 (Old) 12/18 (New) Revenue (IDRbn) 16,000 15,038 17,715 16,005 Gross profit (IDRbn) 6,576 5,564 7,529 6,082 Operating profit (IDRbn) 3,696 2,707 4,517 3,201 NP (IDRbn) 3,145 2,381 3,802 2,774 Source: estimates 4
(INTP IJ/Sell/TP: IDR13,000) Income Statement (Summarized) Statement of Financial Condition (Summarized) (IDRbn) 12/15 12/16 12/17F 12/18F (IDRbn) 12/15 12/16 12/17F 12/18F Revenue 17,798 15,362 15,038 16,005 Cash 8,656 9,674 11,054 12,159 Cost of Goods Sold 9,889 9,030 9,474 9,923 Trade Receivables 2,535 2,605 2,348 2,499 Gross Profit 7,909 6,331 5,564 6,082 Inventories 1,609 1,780 1,661 1,740 Operating Expenses -2,880-2,714-2,857-2,881 Other CA 335 365 283 301 Operating Profit 5,029 3,618 2,707 3,201 PPE 13,814 14,644 15,162 15,916 other income/(loss) 588 502 438 466 Other Non-CA 691 1,082 180 192 Pretax Profit 5,645 4,146 3,175 3,699 Total Assets 27,638 30,151 30,689 32,807 Income Tax 1,288-275 794 925 Trade Payables 1,103 1,519 1,182 1,238 Non-Controlling Interest 0 0 0 0 ST debt 60 70 51 54 Net Profit 4,357 3,870 2,381 2,774 Total current liabilities 2,688 3,188 2,745 2,874 LT debt 61 37 37 37 Profitability ratio Total Liabilities 3,772 4,012 3,524 3,701 Gross Profit Margin 44.4% 41.2% 37.0% 38.0% Common Stock 1,841 1,841 1,841 1,841 Operating Profit Margin 28.3% 23.5% 18.0% 20.0% Paid in Capital 2,699 2,699 2,699 2,699 Net Profit Margin 24.5% 25.2% 15.8% 17.3% Retained Earnings 19,541 21,883 22,910 24,851 Return on Equity 18.3% 14.8% 8.8% 9.5% Non-Controlling Interest 0 0 0 0 Return on Asset 15.8% 12.8% 7.8% 8.5% Equity (ex minority) 23,866 26,139 27,165 29,106 Cash Flow (Summarized) (IDRbn) 12/15 12/16 12/17F 12/18F Operating Cash Flow Net income 4,357 3,870 2,381 2,774 Depreciation and amortization 858 927 982 1,046 in trade receivables -136 71-257 151 in inventories -57 172-119 79 in others CA -160 30-82 18 in trade payable -72 416-337 56 in accrued expense -378 96 23 24 in others CL -134-21 -110 46 Net cash operating activities 4,995 5,025 3,378 3,702 Investing Cash Flow in PPE 2,528 1,757 1,500 1,800 Net cash investing activities -2,565-2,149-598 -1,812 Financing Cash Flow in other liability 38-261 -45 48 in equity 5,068 1,598 1,355 833 Net cash financing activities -5,030-1,858-1,400-786 Net cash -2,601 1,018 1,380 1,105 beginning balance 11,256 8,656 9,674 11,054 ending balance 8,656 9,674 11,054 12,159 Source: Company, estimates 5
APPENDIX 1 Important Disclosures & Disclaimers Disclosures As of the publication date, PT Mirae Asset Sekuritas Indonesia, 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% * Ratings and Target Price History (Share price (----), Target price (----), Not covered ( ), Buy ( ), Trading Buy ( ), Hold ( ), Sell ( )) * 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 Daewoo Securities, 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. Mirae Asset Daewoo Co., Ltd. ( 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 Korea and a member of the Korea Exchange. 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