(SMGR IJ) Moderate growth in September Cement Company Report October 13, 2017 (Maintain) Hold Target Price (12M, IDR) 9,700 Share Price (10/12/17, IDR) 10,750 Expected Return -9.8% Consensus OP (17F, IDRtr) 4.5 EPS Growth (17F, %) -22.9 P/E (17F, x) 18.3 Industry P/E (17F, x) 20.3 Benchmark P/E (17F, x) 17.6 Market Cap (IDRbn) 63,763.8 Shares Outstanding (mn) 5,931.5 Free Float (mn) 2,906.1 Institutional Ownership (%) 70.9 Beta (Adjusted, 24M) 1.2 52-Week Low (IDR) 8,050 52-Week High (IDR) 11,075 (%) 1M 6M 12M Absolute 2.9 19.8 7.0 Relative 2.0 14.8-3.5 (D-1yr=) 120 JCI SMGR 110 90 80 70 10/17 9/17 8/17 7/17 6/17 5/17 4/17 3/17 2/17 1/17 12/16 11/16 10/16 In September, (SMGR) booked domestic cement sales volume of 2.5mn tonnes (+3.7% YoY, -5.8% MoM). The growth is quite moderate compared to industry s growth at 11.9% YoY. We believe this moderate growth was due to the industry s growth being led by areas which are not SMGR s main market areas, such as Jakarta, Banten, and West Java. In the meanwhile, SMGR s home market areas, such as East Java, only showed modest growth. We roll forward our valuation basis to next year. We maintain our Hold recommendation on SMGR, but raise our target price to IDR9,700 (from IDR9,000). The upside risks to our call include: 1) strongerthan-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. The downside risks include: 1) weaker-than expected average selling price (ASP); 2) higher-than expected Accounts Receivable (AR) days due to late payment from customers; 3) delayed infrastructure projects. SMGR s domestic volume sales grow +3.7% YoY, -5.8% MoM in September In September, total domestic cement consumption grew encouragingly with a double-digit increase (+11.9% YoY) to 6.3mn tonnes (see Figure 1), although it declined -3.0% from August s consumption volume. Domestic cement consumption is, thus, keeping up a high-volume trend in 2H17, which we think, as government spending tends to be higher in 2H than in 1H. It is also surprising to see that the West part of Java (especially Jakarta and Banten) rose significantly (see Figure 2) in September. We note that in terms of YoY growth, Jakarta and Banten areas have been lagging behind other parts of Java during YtD this year (see Figure 4). Cumulative January-September domestic cement consumption came in at 47.4mn tonnes (+6.1% YoY, see Figure 3). Along with the industry s improvement in volume, SMGR also proliferates in its volume sales (see Figure 5). In September, SMGR booked domestic cement sales volume of 2.5mn tonnes (+3.7% YoY, - 5.8% MoM), contributed by Semen Padang (+8.3% YoY), (+3.0% YoY), and Semen Tonasa (+0.3% YoY). SMGR s growth in September volume sales (+3.7% YoY) is quite moderate compared to the industry growth (+11.9% YoY). We believe this is attributable to the fact that areas, which booked high growth in September s volume consumption, are not SMGR s main market areas. Cumulatively 9M17, SMGR booked 19.4mn tonnes domestic cement volume sales (+4.0% YoY) (see Figure 6). Meanwhile, SMGR s export volume keeps growing by 108.1% YoY to 125,890 tonnes, leading to 1.4mn tonnes cumulative 9M17 export volume this year. Expecting strong quarterly revenue improvement in 3Q17 SMGR is likely to see significant QoQ revenue improvements in 3Q17 in view of 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. However, we still expect SMGR s net profit FY17 performance to weaken YoY, mainly because 1) depressed ASP and higher fuel and power costs still pose a risk to margins, and 2) high base effect due to asset revaluation that SMGR did last year, which boosted up SMGR s net profit last year. 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) 11.5 14.1 14.1 18.3 15.6 P/B (x) 2.7 2.4 2.2 2.1 1.9 ROE (%) 23.1% 17.1% 15.6% 11.4% 12.2% ROA (%) 16.2% 11.9% 10.2% 7.0% 7.5% Note: NP refers to net profit attributable to controlling interests Source: Company data, estimates
Risk from higher fuel and power costs remains intact Fuel and power costs have been additional burden for cement producers this year. The coal price uptrend since 3Q16 has weighed on SMGR s profit margin amid sluggish revenue (see Figure 8), while fierce industry competition has depressed ASP. We note that fuel component in SMGR s cement cost structure surged approximately 20% YoY in 1H17. With coal prices rising in 3Q17 compared to last quarter (see Figure 7), we believe fuel and power costs still pose a risk to margins during the slow revenue recovery. Welcoming Mr. Hendi Prio Santoso as SMGR s new captain In an extraordinary shareholder meeting on September 15, Mr. Hendi Prio Santoso was appointed SMGR s new President Director, replacing Mr. Rizkan Chandra who passed away last July. Mr. Santoso was former President Director of Perusahaan Gas Negara Tbk (PGAS IJ/ Not rated) from 2008 to June 2017. In addition to its new President Director, SMGR reshuffles its board of directors and board of commissioners (refer to Tables 1 and 2). Table 1. SMGR s Board of Commissioners Source: Company data, estimates Table 2. SMGR s Board of Directors Source: Company data, estimates Introducing slag cement as new product type With infrastructure development becoming Indonesia s priority projects, SMGR launched a slag cement product named MAXSTRENGTH Cement on August 30 th. Slag cement is a variant of Portland cement; it utilizes slag from steel industry as one of its raw materials. We believe SMGR s slag cement will act as a catalyst for volume growth in the future, although its contribution to overall revenue will still relatively small for now. Maintain Hold on SMGR We roll forward our valuation basis to next year. We maintain our Hold recommendation on SMGR, but raise our target price to IDR9,700 (from IDR9,000). We value SMGR as: 1) SMGR is the biggest cement producer in Indonesia with installed capacity of more than 30mn tonnes per year; 2) its wide coverage of market area, due to its scattered plant facilities in Sumatra, Jawa, and Sulawesi; 3) its exposure to infrastructure development as a state-owned enterprise. 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. The downside risks include: 1) weaker-than expected average selling price (ASP); 2) higher-than expected Accounts Receivable (AR) days due to late payment from customers; 3) delayed infrastructure projects. 2
Figure 1. Monthly domestic cement sales volume Figure 2. September s domestic cement sales volume by area in Java 2017 2016 Sep-16 Sep-17 7.00 6.50 6.00 5.50 5.00 4.50 4.00 3.50 5.17 4.55 5.03 5.03 5.48 3.73 5.64 6.50 6.30 1,000 900 800 700 600 500 400 300 200 3.00 0 West Java East Java Central Java Jakarta Banten Yogyakarta Source: Company data, ASI, Source: Company data, ASI, Figure 3. Cumulative domestic cement sales volume Figure 4. Domestic cement sales volume by area, 9M17 9M16 9M17 48.00 47.50 47.00 46.50 46.00 45.50 +6.1% 47.43 8.0 7.0 6.0 5.0 4.0 +14% +8% +17% +2% 45.00 44.50 44.70 3.0 2.0 +5% 44.00 43.50 43.00 9M16 9M17 1.0 0.0 East Java West Java Central Java +14% Jakarta Banten Yogyakarta Source: Company data, ASI, Source: Company data, ASI, Figure 5. SMGR s domestic cement sales volume Figure 6. SMGR s domestic cement sales volume, 9M17 2017 2016 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, 3
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 October 13, 2017 Figure 7. Coal prices Figure 8. Coal prices vs. SMGR s quarterly GPM (USD/MT) 120 110 90 80 70 60 50 40 Start 3Q17 Coal prices SMGR's GPM (USD/MT) (%) 120 43.0% 110 41.0% 39.0% 90 37.0% 35.0% 80 33.0% 70 31.0% 60 29.0% 50 27.0% 40 25.0% Source: Bloomberg, Source: Bloomberg, Company data, 4
(SMGR/Hold/TP IDR9,700) 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 5,396 4,967 Cost of Goods Sold 16,302 16,278 18,760 20,534 Trade Receivables 3,544 3,838 4,014 4,461 Gross Profit 10,646 9,856 9,664 11,057 Inventories 2,409 2,671 2,927 3,204 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 49,699 54,164 Income Tax 1,325 550 1,045 1,223 Trade Payables 3,783 4,078 6,246 6,836 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 current liabilities 6,599 8,152 9,960 10,898 LT debt 3,156 4,450 6,477 7,204 Profitability ratio Total Liabilities 10,712 13,653 17,446 19,225 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% 7.0% 7.5% 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 and amortization 1,366 2,111 1,978 2,218 in trade receivables 243 294 176 447 in inventories -403 262 256 277 in others CA 0 419-105 101 in trade payable 752 295 2,168 591 in accrued expense 188 44 12 12 in others CL 140 249-176 157 Net cash operating activities 7,374 7,209 6,944 6,413 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 2,548-430 beginning balance 4,940 3,989 2,848 5,396 ending balance 3,989 2,848 5,396 4,967 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. 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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