Equity Research Company Update Friday, 20 October 2017 HOLD Maintain Last price (IDR) 10,500 Target Price (IDR) 9,600 Upside/Downside -8.6% Previous Target Price (IDR) 8,600 Stock Statistics Sector Bloomberg Ticker Cement SMGR IJ No of Shrs (mn) 5,932 Mkt. Cap (IDR bn/usdmn) 64,209/4,752 Avg. daily T/O (IDR bn/usdmn) 56.4/4.2 Major shareholders Republic of Indonesia 51.0% Lazard LTD 2.4% Estimated free float (%) 39.3 EPS Consensus(IDR) 2017F 2018F 2019F Danareksa 422.7 477.3 562.0 Consensus 537.6 634.4 732.8 Danareksa/Cons (21.4) (24.8) (23.3) SMGR relative to JCI Index Semen Indonesia (Persero)(SMGR IJ) Price cuts in the offing Yesterday, we met several Semen Gresik distributors who focus on the West Java and Greater Jakarta areas. According to them, the current reduction in cement prices in these areas was mainly initiated by INTP. Hence, as a market follower, Semen Gresik needs to follow INTP s move in order to maintain market share. We reiterate our HOLD call on SMGR with a higher target price of IDR9,600, as we roll over our valuation to 2018. Our target price implies 20.1x 2018F P/E. Price cuts continue in several areas. Although new players - for instance SCG, Jui Shin, and Semen Jakarta - are becoming less aggressive, INTP, as the price leader, is continuing to aggressively cut prices in several areas, including West Jakarta. After INTP cut its cement price by IDR2,000/sack in September 2017, several distributors of Tigaroda apparently plan to cut prices by another IDR1,500/sack in late October or early November 2017. Consequently, Semen Gresik will need to follow suit in order to maintain its market share. In other areas such as Tangerang and South Tangerang the price of Tigaroda has been maintained at relatively flat levels. SMGR s promotional program. Starting earlier this year, SMGR started a new promotional program for distributors which allows them to collect points for 1 DO of cement sales (equivalent to 8 tons of cement) or equivalent to IDR35,000-40,000. Furthermore, starting in January 2018, SMGR will also initiate a financing program for distributors. This program is a collaboration with Bank Mandiri (BMRI). In this program, once the payment is due (after 37 days of delivery), BMRI will settle the payment owed to SMGR. Should distributors choose to delay their payment, BMRI will charge a 9% interest rate/pa, considerably lower than the normal rate for personal loans of 12-15%. Reiterate HOLD with a higher target price of IDR9,600. We reiterate our HOLD call on SMGR with a higher target price of IDR9,600 as we roll over our valuation to 2018 whilst lowering our risk-free rate from 7.8% to 7.0% to take into account the declining trend in government bond yields from 8.0% in early 2017 to 6.9% currently. To arrive at our target price, we use DCF based valuation with WACC of 12.6% and Terminal Growth of 4.0%. Our target price implies 20.1x 2018 P/E, near to +1SD PE of 19.7x. We expect a rerating in SMGR s valuation as we believe that downside on the cement selling price will be limited in 2018. Source : Bloomberg Antonia Febe Hartono, CFA (62-21) 29 555 888 ext.3504 antonia.hartono@danareksa.com Stefanus Darmagiri (62-21) 29 555 831 stefanus.darmagiri@danareksa.com Exhibit 1. REVENUE AND GROWTH Key Financials Year to 31 Dec 2015A 2016A 2017F 2018F 2019F Revenue, (IDRbn) 26,948 26,134 27,146 28,985 31,829 EBITDA, (IDRbn) 7,326 6,611 5,390 5,916 6,858 EBITDA Growth, (%) (10.8) (9.8) (18.5) 9.8 15.9 Net profit (IDRbn) 4,521 4,522 2,507 2,831 3,333 EPS (IDR) 762.3 762.3 422.7 477.3 562.0 EPS growth (%) (18.7) 0.0 (44.6) 12.9 17.7 BVPS, (IDR) 4,454.1 4,895.1 5,011.2 5,318.5 5,688.5 DPS, (IDR) 377.0 306.6 306.6 170.0 192.0 PER (x) 14.0 14.0 25.3 22.4 19.0 PBV (x) 2.4 2.2 2.1 2.0 1.9 Dividend yield (%) 3.5 2.9 2.9 1.6 1.8 EV/EBITDA (x) 8.7 10.1 12.5 11.4 10.1 Source : SMGR, Danareksa Estimates Exhibit 2. NET PROFIT AND GROWTH www.danareksa.com See important disclosure at the back of this report 1
Source: Company, Danareksa Sekuritas estimates Source: Company, Danareksa Sekuritas estimates Exhibit 3. MARGINS Exhibit 4. GEARING LEVEL Source: Company, Danareksa Sekuritas estimates Source: Company, Danareksa Sekuritas estimates Exhibit 5. Forward P/E band of SMGR (x ) 25.0 23.0 2sd 21.0 1sd 19.0 17.0 Average: 16.65 15.0-1sd 13.0 11.0-2sd 9.0 Jan 11 Jan 12 Jan 13 Jan 14 Jan 15 Jan 16 Jan 17 Source: Bloomberg, Danareksa Sekuritas estimates Exhibit 6. Forward P/E band of Sector (x ) 40.0 35.0 2sd 30.0 1sd 25.0 Average: 19.93 20.0-1sd 15.0 10.0 Jan 11 Jan 12 Jan 13 Jan 14 Jan 15 Jan 16 Jan 17 Source: Bloomberg, Danareksa Sekuritas estimates Longer terms of payment. In a bid to support distributors amidst stiffer competition in the domestic market, SMGR has lengthened its terms of payment from 30 days in 2016 to 37 days currently. Going forward, the company also indicated that it would maintain its current payment terms. Sharing the same view, we maintain our account receivables turnover assumption at 56 days in 2018. www.danareksa.com See important disclosure at the back of this report 2
Exhibit 7. Price changes in Greater Jakarta area (October 2017 compared to end-july 2017) Merah Putih Bima Conch Holcim Gresik Tigaroda SCG -9.3% -6.6% -5.2% -3.4% 0.0% 0.0% 1.2% Source: Danareksa Sekuritas INTP, Merah Putih, and Conch remain aggressive. Only Tiga Roda and Merah Putih still offer fairly aggressive promotions in terms of a trip bonus for certain sales quotas. Conch, despite not offering aggressive promotional programs to distributors, provides building material stores with very aggressive pricing. Conch s selling price to building material stores could be as low as IDR29,000 for a 40kg sack (based on our channel check, by comparison, the retail price in building material stores is IDR36,000 for a 40kg sack). Pricing near to its floor. Although INTP is still reducing prices in several regions, this strategy is taken in certain areas only, with no intention to lower industry prices further. In addition, the fact that the new players have tended to keep prices flat over the past three months suggests that cement prices are near to their bottom. In 4Q17, we only expect additional 1-2%qoq price declines with prices flattish in 1H18. Slight price appreciation might be on the cards in 2H18. Nonetheless, given that prices trended down in 2017, even despite slight increases in 2H18, on an average basis, the prices in 2018 will only be flat compared to 2017. Exhibit 8. Net domestic SMGR ASP in IDR/ton 780,000 770,000 760,000 750,000 740,000 730,000 720,000 710,000 700,000-10.0% -8.0% -6.0% -4.0% -2.0% 0.0% 2.0% Jan Feb Mar Apr May June July Aug Sep 4Q17F 1H18F 2H18F Source: SMGR, Danareksa Sekuritas Monthly Average quarterly Guidance on bagged cement sales in October 2017. Regarding the sales volume in October 2017, distributors claimed that the demand for bagged cement, particularly Semen Gresik, improved from September 2017. The improvement in the demand was mainly driven by retail purchases, mainly for house renovation. The Aceh and Kupang plants are under review. SMGR has decided to review the Semen Aceh plant given overhanging land issues. At the same time, plans to develop the Kupang plant will also be reviewed. Given the progress so far on www.danareksa.com See important disclosure at the back of this report 3
these plants, we push back our completion target for these cement plants from 2020 to 2021. Results preview in 3Q17: To remain sluggish Despite the stellar sales volume growth in 9M17 (+9.0%yoy), we expect SMGR to only record net profits of IDR1.8tn in 9M17, down by 39.5%yoy. This is largely due to 13.9%yoy compression in ASP. The 9M17 net profits are 69.8% of our full year net profits target of IDR2.5tn. Exhibit 9. Earning preview 9M16 6M17 9M17F yoy 2017 A/F Revenue (Rp bn) 19,082 12,713 19,689 3.2 27,146 72.5 Gross profit (Rp bn) 7,574 3,855 5,950 (21.4) 8,382 71.0 Operating profit (Rp bn) 3,872 1,614 2,403 (37.9) 3,390 70.9 EBITDA (Rp bn) 5,019 2,533 3,821 (23.9) 5,390 70.9 Pretax income (Rp bn) 3,868 1,492 2,284 (41.0) 3,251 70.2 Net Income (Rp bn) 2,929 1,092 1,749 (40.3) 2,507 69.8 Margin Gross profit margin (%) 39.7 30.3 30.2 30.9 Operating margin (%) 20.3 12.7 12.2 12.5 EBITDA margin (%) 26.3 19.9 19.4 19.9 Net margin (%) 20.3 11.7 11.6 12.0 Source: SMGR, Danareksa Sekuritas Exhibit 10. Forecast changes Previous New Changes (%) 2016 2017F 2018F 2017F 2018F 2017F 2018F ASP (Rp/ton) 864,172 824,805 824,805 792,435 792,435 (3.9) (3.9) Sales volume (mn ton) 28.7 30.4 32.2 30.9 32.9 1.6 2.3 Coal price (USD/ton) 66.5 70.0 72.0 80.0 75.0 14.3 4.2 Electricity cost (Rp/kWh) 857 892 927 892 927 - - Revenue 26,134 26,844 28,495 27,146 28,985 1.1 1.7 Gross profit 9,856 9,179 9,519 8,382 9,021 (8.7) (5.2) EBITDA 6,611 6,255 6,591 5,390 5,916 (13.8) (10.2) Net profit 4,522 3,161 3,236 2,507 2,831 (20.7) (12.5) Source: SMGR, Danareksa Sekuritas www.danareksa.com See important disclosure at the back of this report 4
Exhibit 11. Income Statement Year to 31 Dec (IDRbn) 2015A 2016A 2017F 2018F 2019F Revenue 26,948 26,134 27,146 28,985 31,829 COGS (16,302) (16,278) (18,764) (19,963) (21,801) Gross profit 10,646 9,856 8,382 9,021 10,028 EBITDA 7,326 6,611 5,390 5,916 6,858 Oper. profit 5,899 4,973 3,390 3,790 4,463 Interest income 241 184 153 247 365 Interest expense (370) (363) (513) (633) (781) Forex Gain/(Loss) 0 0 0 0 0 Income From Assoc. Co s 34 37 19 56 56 Other Income (Expenses) 46 254 203 211 220 Pre-tax profit 5,851 5,085 3,251 3,671 4,322 Income tax (1,325) (550) (737) (832) (979) Minority interest (4) (13) (7) (8) (10) Net profit 4,521 4,522 2,507 2,831 3,333 Core Net Profit 4,521 4,522 2,507 2,831 3,333 Exhibit 12. Balance Sheet Year to 31 Dec (IDRbn) 2015A 2016A 2017F 2018F 2019F Cash & cash equivalent 3,964 2,834 3,802 5,622 5,682 Receivables 3,629 4,018 4,323 4,615 4,981 Inventory 2,409 2,671 3,233 3,440 3,757 Other Curr. Asset 512 835 870 925 1,007 Fixed assets - Net 25,168 30,847 31,587 33,501 37,000 Other non-curr.asset 2,447 3,007 3,035 3,064 3,093 Total asset 38,153 44,227 46,863 51,181 55,534 ST Debt 769 1,686 1,225 1,781 2,071 Payables 3,978 4,383 4,795 5,102 5,571 Other Curr. Liabilities 1,853 2,083 2,232 2,260 2,325 Long Term Debt 3,156 4,450 6,256 7,817 9,105 Other LT. Liabilities 958 1,051 1,092 1,135 1,181 Total Liabilities 10,712 13,653 15,600 18,096 20,254 Shareholder'sFunds 26,420 29,035 29,724 31,547 33,741 Minority interests 1,021 1,539 1,539 1,539 1,539 Total Equity & Liabilities 38,153 44,227 46,863 51,181 55,534 www.danareksa.com See important disclosure at the back of this report 5
Exhibit 13. Cash Flow Year to 31 Dec (IDRbn) 2015A 2016A 2017F 2018F 2019F Net income 4,521 4,522 2,507 2,831 3,333 Depreciation and Amort. 1,443 1,653 2,015 2,141 2,410 Change in Working Capital 1,239 (388) (377) (195) (213) OtherOper. Cash Flow 214 (427) 360 386 416 Operating Cash Flow 7,418 5,360 4,505 5,163 5,947 Capex (5,168) (5,065) (2,745) (4,045) (5,899) Others Inv. Cash Flow (183) (280) 115 208 325 Investing Cash Flow (5,351) (5,345) (2,630) (3,837) (5,574) Net change in debt (28) 1,741 1,383 2,092 1,561 New Capital 0 0 0 0 0 Dividend payment 2,236 1,819 1,819 1,008 1,139 Other Fin. Cash Flow (370) (363) (472) (590) (736) Financing Cash Flow 1,838 3,196 2,730 2,511 1,964 Net Change in Cash 3,904 3,211 4,605 3,837 2,337 Cash - begin of the year 4,926 3,964 2,834 3,802 5,622 Cash - end of the year 3,964 2,834 3,802 5,622 5,682 Exhibit 14. Key Ratios Year to 31 Dec 2015A 2016A 2017F 2018F 2019F Growth (%) Sales (0.1) (3.0) 3.9 6.8 9.8 EBITDA (10.8) (9.8) (18.5) 9.8 15.9 Operating profit (15.1) (15.7) (31.8) 11.8 17.8 Net profit (18.7) 0.0 (44.6) 12.9 17.7 Profitability (%) Gross margin 39.5 37.7 30.9 31.1 31.5 EBITDA margin 27.2 25.3 19.9 20.4 21.5 Operating margin 21.9 19.0 12.5 13.1 14.0 Net margin 16.8 17.3 9.2 9.8 10.5 ROAA 12.5 11.0 5.5 5.8 6.2 ROAE 17.9 16.3 8.5 9.2 10.2 Leverage Net Gearing (x) 0.0 0.1 0.1 0.1 0.2 Interest Coverage (x) 15.9 13.7 6.6 6.0 5.7 Source : SMGR, Danareksa Estimates See important disclosure at the back of this report 6