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Danareksa Equity Snapshot - SMBR 16 Januari 2017
January 16, 2017 10:34 WIB

Semen Baturaja

Improving performance but rich valuation

We reiterate our SELL call on SMBR with a target price of Rp390 (DCF based valuation with WACC of 12.0% and growth of 3.0%). Our target price implies 25.6x 2017F PE, slightly below SMBR’s four-year average forward PE of 30.4x. While we believe that SMBR can increase its sales volume by 6.5% yoy and its EBITDA margin by 3.5ppt in 2017, we don’t believe that its lofty valuation can be justified. SMBR is currently trading at 144.3x 2017F P/E.

Encouraging performance in 2016 and we expect the trend to continue in 2017. In 2016, SMBR managed to record sales volume of 1.6mn tons, up by 6.1%, outperforming the industry which saw flattish cement sales in 2016. SMBR’s stellar performance was supported by the development of multiple infrastructure projects, including LRT Palembang and the Palembang Indralaya toll road. In 2017, we expect the uptrend in cement sales to continue, with the company estimated to record total sales of 1.7mn tons, up by 6.5% yoy. Note that our sales target is 15.0% lower than the management’s target of 2.0mn tons.

Higher sales will come at the expense of lower ASP, however. Given the arrival of new entrants and considering the close proximity of SMBR’s home market to the western part of Java, we believe that pricing pressure in the retail market will be more severe in 2017, particularly in Lampung and South Sumatera. Our view is that SMBR will more aggressively defend its supremacy in its home market following the commencement of the Baturaja II plant with capacity of 1.85mn tons.

Baturaja II to start commercial production soon. SMBR is still constructing its Baturaja II plant with installed capacity of 1.85mn tons. Construction progress has reached 90%. As such, the company expects to start commercial production in 2H17. Upon commencement of this plant, we believe that the portion of externally purchased clinkers will decline considerably (in 2016, purchased clinkers reached 280,000 tons, while in 2017 they will only reach an estimated 120,000 tons). Coupled with lower electricity costs from the migration to electricity consumption bracket I-4 from I-3, we estimate that the company’s EBITDA margin will widen by 3.5ppt in 2017.

Maintain SELL. We reiterate our SELL call on SMBR with a target price of Rp390 (DCF based valuation with WACC of 12.0% and growth of 3.0%), slightly lower than our previous target price of Rp400, as we take into account the expectation of higher energy prices and more severe pressure on pricing.

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Danareksa Equity Snapshot - INTP 16 Januari 2017
January 16, 2017 10:32 WIB

Indocement Tunggal Prakarsa

No respite

We maintain our SELL call on INTP with a target price of Rp13,000 (DCF based valuation with WACC of 13.8% and Terminal Growth of 4.0%). After reporting negative sales growth in two consecutive years, we believe that INTP will manage to achieve 2.0% yoy higher sales volume in 2017. In terms of profitability, however, INTP’s EBITDA margin will be squeezed by an estimated 3.3ppt given: (i) continued pressure on pricing, (ii) increasing energy costs.

We foresee sales recovery in 2017. In 2016, INTP recorded total sales of 16.4mn tons, down by 3.1% yoy due to: (i) tighter competition in INTP’s home market, (ii) slow progress on government infrastructure projects, (iii) sluggish overall purchasing power. INTP’s 2016 sales volume is 100.2% of our full year target of 16.4mn tons – i.e. INLINE. For 2017, we estimate that INTP will record 2.0% higher sales volume.

Maintaining supremacy in its home markets comes at the cost of lower ASP. Although most new players have entered INTP’s home markets, INTP would still like to maintain its supremacy in these markets which include Jakarta, Banten, and West Java, even though this will come at the expense of lower pricing. With the close proximity of its production plant to its main markets, the company enjoys lower transportation and distribution costs. Nevertheless, lower ASP seem inevitable. In 2017, we expect INTP’s ASP to fall by 6.0%yoy.

Better coal supplier mix to minimize the impact of increasing coal prices. In the face of increasing coal prices, INTP intends to increase the proportion of coal supplied by mid and small coal miners as well as use lower CV coal that typically has lower prices. Nevertheless, as around 40-60% of coal supply price agreements are index linked, we believe that INTP will remain exposed to increasing coal prices. Coupled with the pressure on pricing, we expect INTP to report lower EBITDA by 3.3 ppt in 2017.

Minimal capex in 2017. After completing its P14 plant in 3Q16, INTP has only allocated Rp1.7-1.8tn for capex this year. The capex will mainly be used to build a terminal in Sumatera to facilitate product distribution. Considering that INTP still has Rp1.9tn of cash available, we don’t believe the company will need to take on any external financing for its capex.

Maintain SELL with a lower target price. We maintain our SELL call on INTP with a lower target price of Rp13,000 (DCF based valuation with WACC of 13.8% and terminal growth of 4.0%) as we anticipate even more severe pricing pressure in 2017 in addition to higher coal prices. At the same time, we also trim our long term ASP growth from 4.0% yoy to 3.5% yoy. Our new target price implies 18.7x 2017F P/E.

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Danareksa Equity Snapshot - SMGR 16 Januari 2017
January 16, 2017 10:31 WIB

Semen Indonesia (SMGR IJ)

Still facing hard times

We maintain our SELL call on SMGR with a target price of Rp8,000 (DCF based valuation with WACC of 12.7% and terminal growth of 4.0%). Although sales volume is expected to improve by 3.0% yoy this year, pricing pressure and rising energy costs will lead to 3.2% lower EBITDA in 2017, in our estimate.

We expect higher sales volume in 2017 … After SMGR recorded flattish sales in 2016 (-0.5% yoy), we forecast higher sales growth this year (+3.0% yoy). We believe that upon commencement of new plants (Indarung and Rembang each have capacity of 3mn tonnes), the company will penetrate markets more aggressively in a bid to maintain its utilization rate above 70% and market share above 40%. Note, however, that our target is slightly below the management’s target of 5.0% yoy sales volume growth. 

… which will be offset by lower ASP. We estimate that SMGR will record negative revenues growth of -1.5% yoy. In our view, lower ASP will continue to weigh on the company’s financial performance. From the 6mn tons of additional capacity, the company expects to sell 4mn tons of cement per annum. To achieve this target, the company expects to lower ASP by 5%.

Meanwhile, energy costs are trending up … Although SMGR aims to make efficiency gains and reduce operating expenses, cost savings will be offset by higher energy prices. With the uptrend in coal prices, further pressure on margins is inevitable. This year, we expect SMGR’s EBITDA margin to contract 3.2%. At the current time, the company is negotiating with coal suppliers to supply coal at Rp540,000/ton. Should the coal suppliers agree to this request, this will translate into 8.0% yoy higher coal prices.

… and gearing is increasing. SMGR has allocated Rp6tn for capex this year to build (i) two plants in Aceh and Kupang with capacity of 2.5-3mn tonnes each, (ii) two packing plants in Bengkulu and Maluku, and to complete construction of WPHRG with capacity of 35MW in Tuban. To finance the capex, the company plans to draw down additional bank loans as well as explore the possibility of issuing new bonds. Either way, we believe that the company’s gearing ratio will increase. We estimate that SMGR’s gearing ratio will increase from 17.7% in 9M16 to 23.2% in 2017.

Maintain our SELL call with lower target price We maintain our SELL call on SMGR with a target price of Rp8,000 (DCF based valuation with WACC of 12.7% and Terminal Growth of 4.0%). We adjust down our net profit by 5.8% in 2017 to take into account higher coal prices and lower ASP.

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