7/16 8/16 9/16 10/16 11/16 12/16 1/17 2/17 3/17 4/17 5/17 6/17 7/17 (SMGR IJ) 2Q17 review: Negative seasonal impact Cement Company Report July 31, 2017 (Maintain) Hold Target Price (12M, IDR) 9,000 Share Price (7/31/17, IDR) 9,950 Expected Return -9.5% Consensus OP (17F, IDRtr) 4.7 EPS Growth (17F, %) -22.9 P/E (17F, x) 16.9 Industry P/E (17F, x) 19.4 Benchmark P/E (17F, x) 16.8 Market Cap (IDRbn) 59,018.6 Shares Outstanding (mn) 5,931.5 Free Float (mn) 2,906.1 Institutional Ownership (%) 70.1 Beta (Adjusted, 24M) 1.3 52-Week Low (IDR) 8,050 52-Week High (IDR) 11,875 (%) 1M 6M 12M Absolute -0.5 10.2 6.1 Relative -0.7-0.1-5.8 (D-1yr=100) JCI SMGR 120 100 80 (SMGR) posted its 2Q17 financial results after the market close last Friday (7/28). For the quarter, its revenue came in at IDR6.3tr (-2.1% YoY; -1.3% QoQ) and net profit at IDR346.5bn (-62.8% YoY; -53.6% QoQ). Despite having reflected weaker achievements on both a yearly and quarterly basis, we think the 2Q17 performance is not comparable in a YoY perspective given that the Eid al-fitr holiday fell in the second quarter in 2017, as compared to the third quarter in 2016. While SMGR s cement performance was sluggish in 2Q17, it is worth noting that its ready-mix concrete (RMC) business saw gradual improvement during the period. We maintain Hold on SMGR with an unchanged target price of IDR9,000. Seasonal event was a drag on performance For 2Q17, SMGR s revenue came in at IDR6.3tr (-2.1% YoY; -1.3% QoQ). Cumulatively, its 1H17 revenue stood at IDR12.7tr (+2.0% YoY), reaching 44.7% and 46.4% of our and consensus FY17 revenue estimates. It seems that the cement business was still gloomy during 1H17 given a decline in SMGR s cement business segment growth (-8.8% YoY). However, the company saw improvement in its other businesses, such as RMC business, which offset its sluggish cement performance. Cement s contribution to SMGR s revenue was squeezed from approx. 96% in 1H16 to only 86% in 1H17, while the RMC business contribution gradually improved from 2% in 1H16 to 6% in 1H17. SMGR s gross profit margin (GPM) stood at 30.3% in 2Q17, far below that in 2Q16 at 39.7%, which we suspect was due to higher coal price (YoY). However, the decline has already been restrained given that the 2Q17 GPM was quite similar to that in 1Q17 at 30.4%, reflecting relatively stable coal prices in both consecutive quarters. In the secondquarter operating level (selling, general, administrative expense (SG&A) level), SMGR s operating profit came in at IDR719.7bn (-45.9% YoY; -19.7% QoQ), and operating margin stood at only 11.4%, (vs. 20.6% in 2Q16 and 14.0% in 1Q17). For the bottom line, SMGR booked IDR346.5bn in net profit, bringing its 6M17 net profit to IDR1.1tr, reaching only 30.7% and 30.6% of our and consensus FY17 net profit estimates. The net profit achievement portion until 1H17 was quite weak compared to the previous years (usually around above 40%). Better volume prospect in 2H17 but ASP remains a challenge SMGR started 2Q17 with a better domestic volume sales achievement by growing +7.4% YoY in April and +3.6% YoY in May. However, the overall 2Q17 performance came down due to the long Eid al-fitr holiday in June. In 2Q17, SMGR booked 5.8mn tonnes in domestic volume sales (-6.5% YoY vs. 6.3mn tonnes in 2Q16). Cumulatively during 6M17, it booked 12mn tonnes in domestic cement sales (-1.8% YoY; see Figure 1 and 2). Its 6M17 volume sales growth was mainly underpinned by (Semen Gresik +4.0% YoY). Meanwhile, Semen Padang and Semen Tonasa saw a decline in their 6M17 volume sales growth (-8.5% YoY and -9.0% YoY, respectively). SMGR benefited from significantly higher growth in East Java area, one of the home markets of its Semen Gresik brand. Note that East Java is the biggest contributor to 1H17 cement consumption in Java. PT. Mirae Asset Sekuritas Indonesia Basic Industry 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) 26,987 26,948 26,134 28,424 31,591 Gross profit (IDRbn) 11,579 10,646 9,856 9,664 11,057 Operating profit (IDRbn) 6,947 5,899 4,973 4,662 5,560 NP (IDRbn) 5,560 4,521 4,522 3,487 4,082 EPS (IDR) 937 762 762 588 688 BPS (IDR) 4,054 4,454 4,895 5,178 5,631 P/E (x) 10.6 13.1 13.1 16.9 14.5 P/B (x) 2.5 2.2 2.0 1.9 1.8 ROE (%) 23.1% 17.1% 15.6% 11.4% 12.2% ROA (%) 16.2% 11.9% 10.2% 7.4% 8.0% Source: Company data, estimates PLEASE SEE ANALYST CERTIFICATIONS AND IMPORTANT DISCLOSURES & DISCLAIMERS IN APPENDIX 1 AT THE END OF REPORT.
SMGR s subsidiary in Vietnam, Thang Long Cement Joint Stock Company (TLCC) also booked sluggish performance during 2Q17. For the quarter, its revenue came in at IDR381.3bn (-18.2% YoY; -3.3% QoQ), and net profit at IDR8bn (-51.1% YoY; -19.4% QoQ). With Eid holiday s effects now behind us and activities having gone back to normal, we expect to see better volume sales in 2H17 (vs. 1H17). However, despite the better outlook for 2H17 cement sales volume, SMGR s weak domestic average selling price (ASP) remains a challenge. We suspect this is due to the persisting tight competition among cement producers and partly due to bulk cement s increased contribution (bulk cement usually has a lower ASP than bag cement). Maintain Hold on SMGR Table 1. SMGR s 2Q17 financial performance summary We still maintain our bearish call on the cement sector given our belief that improvement in cement volume sales will not be enough to offset the decline in YoY ASP this year. High coal prices also pose an additional burden for cement producers. We note that fuel component in SMGR s cement cost structure surged approx. 20% YoY in 1H17. However, despite its sluggish performance in 2Q17 (which we mostly attribute to seasonal effects, which shifted to the second quarter from the third quarter, normally), it is noteworthy that SMGR s other business, the RMC, showed potential growth given its recent gradual improvement, in our view. The exceptional growth in East Java s cement consumption was also positive for SMGR s cement volume growth. We lowered our net profit estimates, reflecting our lowered operating profit margin projections. We also made adjustments in SMGR s debt estimates, reflecting its IDR3tr bond issuance in June 2017. We maintain our Hold recommendation with an unchanged target price of IDR9,000. The upside risks to our call include: 1) stronger-than-expected recovery in the property market; 2) the government s supportive actions for the property and cement sectors; 3) cement industry consolidation; and 4) weaker-than-expected coal prices. FY (Dec.) 2Q16 1Q17 2Q17 YoY QoQ 6M16 6M17 YoY Revenue (IDRbn) 6,449 6,399 6,315-2.1% -1.3% 12,470 12,714 2.0% COGS (IDRbn) -3,887-4,456-4,402 13.3% -1.2% -7,483-8,857 18.4% Gross profit (IDRbn) 2,563 1,943 1,914-25.3% -1.5% 4,988 3,857-22.7% Gross profit margin (%) 39.7% 30.4% 30.3% 40.0% 30.3% Operating profit (IDRbn) - SG&A 1,330 896 720-45.9% -19.7% 2,563 1,616-37.0% NP (IDRbn) 931 747 346-62.8% -53.6% 1,965 1,093-44.4% NP margin (%) 14.4% 11.7% 5.5% 15.8% 8.6% Source: Company data, estimates 1H17 Table 2. SMGR s 1H17 performance vs. before revisions target FY17 (F) FY17 (F) 1H17 (A) actual to FY17F (%) FY (Dec.) Mirae Consensus Actual Mirae Consensus Revenue (IDRbn) 28,424 27,387 12,714 44.7% 46.4% Pre-tax profit (IDRbn) 4,640 4,609 1,494 32.2% 32.4% NP (IDRbn) 3,560 3,570 1,093 30.7% 30.6% Source: Company data, Bloomberg, estimates Table 3. Earnings forecast revisions FY (Dec.) 12/17 (Old) 12/17 (New) 12/18 (Old) 12/18 (New) Revenue (IDRbn) 28,424 28.424 31,591 31.591 Gross profit (IDRbn) 9,664 9.664 11,057 11.057 Operating profit (IDRbn) 4,832 4.662 5,686 5.560 NP (IDRbn) 3,560 3.487 4,220 4.082 Source: Company data, estimates 2
Figure 1. SMGR s domestic cement sales volume Figure 2. SMGR s domestic cement sales volume, 6M17 (mn tonnes) 2017 2016 (mn tonnes) 3.0 2.5 2.0 1.5 2.1 June 17: -29.0% YoY; -29.6% MoM 2.1 2.1 2.2 1.9 1.5 12.3 12.2 12.2 12.1 12.1 12.2-1.8% 1.0 0.5 12.0 12.0 12.0 0.0 11.9 11.9 6M16 6M17 Source: Company data, ASI, Source: Company data, ASI, Figure 3. SMGR s revenue contributors in 1H16 Figure 4. SMGR s revenue contributors in 1H17 2% 6% 1% 4% 3% Cement Ready-Mix Concrete Clinker Mining services Others Cement Ready-Mix Concrete Clinker Mining services Others 96% 86% Source: Company data, Source: Company data, Figure 5. SMGR s historical quarterly GPM Figure 6. SMGR s historical TLCC quarterly revenue (GPM, %) 50.0% 45.0% 40.0% 35.0% 30.0% 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% 1Q132Q133Q134Q131Q142Q143Q144Q141Q152Q153Q154Q151Q162Q163Q164Q161Q172Q17 Source: Company data, (IDRbn) 500 450 400 350 300 250 200 150 100 50-1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 Source: Company data, 3
(SMGR/Hold/TP IDR9,000) 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 26.948 26.134 28.424 31.591 Cash 3.989 2.848 3.454 2.856 Cost of Goods Sold 16.302 16.278 18.760 20.534 Trade Receivables 3.544 3.838 3.120 3.467 Gross Profit 10.646 9.856 9.664 11.057 Inventories 2.409 2.671 3.004 3.288 Operating Expenses -4.747-4.882-5.003-5.497 Other CA 596 1.016 911 1.012 Operating Profit 5.899 4.973 4.662 5.560 PPE 25.168 30.847 33.869 37.651 other income/(loss) -95-142 -201-336 Other Non-CA 2.447 3.007 2.581 2.868 Pretax Profit 5.851 5.085 4.546 5.319 Total Assets 38.153 44.227 46.938 51.143 Income Tax 1.325 550 1.045 1.223 Trade Payables 3.783 4.078 3.485 3.815 Non-Controlling Interest 4 13 13 13 ST debt 846 1.811 1.615 1.794 Net Profit 4.521 4.522 3.487 4.082 Total liabilities current 6.599 8.152 7.199 7.877 LT debt 3.156 4.450 6.477 7.204 Profitability ratio Total Liabilities 10.712 13.653 14.686 16.203 Gross Profit Margin 39,5% 37,7% 34,0% 35,0% Common Stock 593 593 593 593 Operating Profit Margin 21,9% 19,0% 16,4% 17,6% Paid in Capital 1.458 1.458 1.458 1.458 Net Profit Margin 16,8% 17,3% 12,3% 12,9% Retained Earnings 23.815 26.528 28.206 30.893 Return on Equity 17,1% 15,6% 11,4% 12,2% Non-Controlling Interest 1.021 1.539 1.539 1.539 Return on Asset 11,9% 10,2% 7,4% 8,0% Equity (ex minority) 26.420 29.035 30.713 33.400 Cash Flow (Summarized) (IDRbn) 12/15 12/16 12/17F 12/18F Operating Cash Flow Net income 4.521 4.522 3.487 4.082 Depreciation amortization and 1.366 2.111 1.978 2.218 in trade receivables 243 294-718 348 in inventories -403 262 333 284 in others CA 0 419-105 101 in trade payable 752 295-592 330 in accrued expense 188 44 12 12 in others CL 140 249-176 157 Net cash operating activities 7.374 7.209 5.002 6.244 Investing Cash Flow in PPE 6.312 7.790 5.000 6.000 Net cash investing activities -6.297-8.350-4.574-6.288 Financing Cash Flow in other liability 218 93-41 113 in equity 2.148 1.906 1.809 1.395 Net cash financing activities -2.027 0 177-555 Net cash -950-1.141 606-598 beginning balance 4.940 3.989 2.848 3.454 ending balance 3.989 2.848 3.454 2.856 Source: Company, estimates 4
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. PT. Mirae Asset Sekuritas Indonesia ( 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. 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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. 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