(SMGR IJ) 3Q17 review: Below expectations Cement Company Report November 2, 2017 (Maintain) Hold Target Price (12M, IDR) 9,580 Share Price (11/1/17, IDR) 10,500 Expected Return -8.8% Consensus OP (17F, IDRtr) 4.3 EPS Growth (17F, %) -52.2 P/E (17F, x) 28.8 Industry P/E (17F, x) 21.9 Benchmark P/E (17F, x) 17.5 Market Cap (IDRbn) 62,281.0 Shares Outstanding (mn) 5,931.5 Free Float (mn) 2,906.1 Institutional Ownership (%) 71.6 Beta (Adjusted, 24M) 1.1 52-Week Low (IDR) 8,050 52-Week High (IDR) 11,100 (%) 1M 6M 12M Absolute 3.7 19.3 10.5 Relative 1.4 12.9-1.0 (D-1yr=100) 120 110 100 90 80 11/16 11/16 12/16 1/17 1/17 PT. Mirae Asset Sekuritas Indonesia Basic Industry 2/17 3/17 JCI 3/17 4/17 5/17 5/17 6/17 7/17 SMGR 8/17 Mimi Halimin +62-21-515-1140 (ext.: 233) mimi.halimin@miraeasset.co.id 8/17 9/17 10/17 10/17 For 3Q17, (SMGR) booked revenue of IDR7.8tr (+18.5% YoY, +24.1% QoQ), which brought cumulative 9M17 revenue to IDR20.6tr (+7.7% YoY), achieving 72.3% of our FY17 revenue estimate, which is broadly in line. However, 9M17 net profit was IDR1.5tr, achieving just 41.9% of our FY17 net profit forecast far below our expectation due to lower-than expected gross profit margin on higher cost. As a result, we lowered our FY17 net profit forecast by 38.1%. We maintain our Hold recommendation on the company, with a lower target price of IDR9,580. 3Q17 results: Revenue broadly in line; net profit below expectation For 3Q17, (SMGR) booked revenue of IDR7.8tr (+18.5% YoY, +24.1% QoQ). As we had anticipated in our last report on SMGR, the company saw significant QoQ revenue improvement, which we attribute to 1) the Eid al-fitr holiday falling in the second quarter this year, 2) better volume growth during 3Q17, and 3) the recent toning down of the depressed ASP. The cement business remains the major contributor to SMGR s revenue, although its contribution has declined to around 85% in 3Q17 from 90% in 3Q16 as the contributions of the ready-mix concrete and clinker businesses have been increasing this year. For 3Q17, the cement business booked revenue of IDR6.7tr (+12.4% YoY, +29.9% QoQ). During 9M17, SMGR s sales volume came to approximately 8.4mn tonnes (+15.8% YoY and +20.0% QoQ), including domestic, export, and Thang Long Cement Joint Stock Company (TLCC) volume. SMGR s ASP (excluding TLCC) in 3Q17 still contracted (-1.2% QoQ, -7.5% YoY). However, it is toning down from 2Q17 contraction (-2.6% QoQ, -8.1% YoY). Although SMGR s revenue looks promising, its cost of revenue weighed on its 3Q17 performance. Cost of revenue growth (+40.2% YoY, +28.3% QoQ) outpaced revenue growth, leading to gross profit of IDR2.2tr (-15.2% YoY, +14.6% QoQ), resulting in SMGR s GPM declined to 28.0% in 3Q17 vs. 30.3% in 2Q17, mainly driven by higher raw material costs (likely due to its Rembang plant problem) and fuel and electricity costs. As for bottom line, 3Q17 net profit only came in at IDR366.7bn (-62.0% YoY, +5.8% QoQ). Maintain Hold on SMGR We lowered our FY17 net profit forecast by 38.1%, as we factored in SMGR s lower profit margin, resulting lower TP of IDR9,580. However, we maintain our Hold recommendation on the company. Positives for the company include: 1) its status as the biggest cement producer in Indonesia, with installed capacity of more than 30mn tonnes per year; 2) its wide market area coverage, due to its scattered plant facilities in Sumatra, Jawa, and Sulawesi; and 3) its exposure to infrastructure development as a state-owned enterprise. The upside risks to our call include: 1) a stronger-than-expected profit margin recovery; 2) supportive government actions toward the property and cement sectors; 3) cement industry consolidation; and 4) weaker-than-expected coal prices. Downside risks include: 1) weaker-than expected average selling price (ASP); 2) higher-than expected accounts receivable (AR) days due to late payments from customers; and 3) delays to infrastructure projects. 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 8,413 10,425 Operating profit (IDRbn) 6,947 5,899 4,973 3,212 4,770 NP (IDRbn) 5,560 4,521 4,522 2,159 3,288 EPS (IDR) 937 762 762 364 554 BPS (IDR) 4,054 4,454 4,895 4,954 5,363 P/E (x) 11.2 13.8 13.8 28.8 18.9 P/B (x) 2.6 2.4 2.1 2.1 2.0 ROE (%) 23.1% 17.1% 15.6% 7.3% 10.3% ROA (%) 16.2% 11.9% 10.2% 4.4% 6.2% Source: Company data, estimates PLEASE SEE ANALYST CERTIFICATIONS AND IMPORTANT DISCLOSURES & DISCLAIMERS IN APPENDIX 1 AT THE END OF REPORT.
Table 1. SMGR s 3Q17 financial performance summary FY (Dec.) 3Q16 2Q17 3Q17 YoY QoQ 9M16 9M17 YoY Revenue (IDRbn) 6,612 6,315 7,838 18.5% 24.1% 19,082 20,552 7.7% COGS (IDRbn) -4,026-4,402-5,646 40.2% 28.3% -11,509-14,503 26.0% Gross profit (IDRbn) 2,586 1,914 2,192-15.2% 14.6% 7,574 6,049-20.1% Gross profit margin (%) 39.1% 30.3% 28.0% 39.7% 29.4% Operating profit (IDRbn) - SG&A 1,309 720 707-46.0% -1.8% 3,872 2,323-40.0% NP (IDRbn) 964 346 367-62.0% 5.8% 2,929 1,460-50.2% NP margin (%) 14.6% 5.5% 4.7% 15.3% 7.1% Source: Company data, estimates 9M Table 2. SMGR s 9M17 performance vs. before revisions target FY17 (F) FY17 (F) 9M17 (A) actual to FY17F (%) FY (Dec.) Mirae Consensus Actual Mirae Consensus Revenue (IDRbn) 28,424 27,175 20,552 72.3% 75.6% Pre-tax profit (IDRbn) 4,546 4,022 2,002 44.0% 49.8% NP (IDRbn) 3,487 3,144 1,460 41.9% 46.4% 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 8,413 11.057 10,425 Operating profit (IDRbn) 4.662 3,212 5.560 4,770 NP (IDRbn) 3.487 2,159 4.082 3,288 Source: Company data, estimates 2
01/15 02/15 03/15 04/15 05/15 06/15 07/15 08/15 09/15 10/15 11/15 12/15 01/16 02/16 03/16 04/16 05/16 06/16 07/16 08/16 09/16 10/16 11/16 12/16 01/17 02/17 03/17 04/17 05/17 06/17 November 2, 2017 Figure 1. SMGR historical gross profit margin Figure 2. SMGR quarterly total volume sales (GPM, %) 50.0% 45.0% 40.0% 35.0% 30.0% 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% Source: Company data, (mn tonnes) 9.0 8.4 8.0 7.3 7.0 7.0 6.0 5.0 4.0 3.0 2.0 1.0 0.0 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 Source: Company data, ASI, Figure 3. SMGR s domestic cement sales volume Figure 4. SMGR s domestic cement sales volume, 9M17 (mn tonnes) 2017 2016 (mn tonnes) 3.0 2.5 2.0 2.1 1.9 2.1 2.1 2.2 2.2 2.7 2.5 19.6 19.4 19.2 +4.0% 19.4 1.5 1.5 19.0 1.0 0.5 0.0 18.8 18.6 18.4 18.2 18.6 9M16 9M17 Source: Company data, ASI, Source: Company data, ASI, Figure 5. SMGR s receivables turnover (days) Figure 6. Coal prices vs. SMGR s quarterly GPM (days) 60 50 40 30 20 10 0 2012 2013 2014 2015 2016 Coal prices SMGR's GPM (USD/MT) (%) 120 43.0% 110 41.0% 100 39.0% 90 37.0% 35.0% 80 33.0% 70 31.0% 60 29.0% 50 27.0% 40 25.0% Source: Company data, Source: Bloomberg, Company data, 3
(SMGR/Hold/TP IDR9,580) Income Statement (Summarized) Balance Sheet (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 4,290 3,488 Cost of Goods Sold 16,302 16,278 20,010 21,166 Trade Receivables 3,544 3,838 4,014 4,461 Gross Profit 10,646 9,856 8,413 10,425 Inventories 2,409 2,671 3,122 3,303 Operating Expenses -4,747-4,882-5,202-5,655 Other CA 596 1,016 911 1,012 Operating Profit 5,899 4,973 3,212 4,770 PPE 25,168 30,847 33,869 37,651 other income/(loss) -95-142 -400-463 Other Non-CA 2,447 3,007 2,581 2,868 Pretax Profit 5,851 5,085 2,897 4,402 Total Assets 38,153 44,227 48,788 52,785 Income Tax 1,325 550 724 1,101 Trade Payables 3,783 4,078 6,662 7,047 Non-Controlling Interest 4 13 13 13 ST debt 846 1,811 1,615 1,794 Net Profit 4,521 4,522 2,159 3,288 Total liabilities current 6,599 8,152 10,376 11,109 LT debt 3,156 4,450 6,477 7,204 Profitability ratio Total Liabilities 10,712 13,653 17,863 19,435 Gross Profit Margin 39.5% 37.7% 29.6% 33.0% Common Stock 593 593 593 593 Operating Profit Margin 21.9% 19.0% 11.3% 15.1% Paid in Capital 1,458 1,458 1,458 1,458 Net Profit Margin 16.8% 17.3% 7.6% 10.4% Retained Earnings 23,815 26,528 26,879 29,303 Return on Equity 17.1% 15.6% 7.3% 10.3% Non-Controlling Interest 1,021 1,539 1,539 1,539 Return on Asset 11.9% 10.2% 4.4% 6.2% Equity (ex minority) 26,420 29,035 29,386 31,811 Cash Flow (Summarized) (IDRbn) 12/15 12/16 12/17F 12/18F Operating Cash Flow Net income 4,521 4,522 2,159 3,288 Depreciation amortization and 1,366 2,111 1,978 2,218 in trade receivables 243 294 176 447 in inventories -403 262 451 180 in others CA 0 419-105 101 in trade payable 752 295 2,584 385 in accrued expense 188 44 12 12 in others CL 140 249-176 157 Net cash operating activities 7,374 7,209 5,838 5,510 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 1,809 864 Net cash financing activities -2,027 0 177-24 Net cash -950-1,141 1,442-802 beginning balance 4,940 3,989 2,848 4,290 ending balance 3,989 2,848 4,290 3,488 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. 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. 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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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