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Danareksa Equity Snapshot - Cement Sector Januari 2018
January 10, 2018 10:14

Cement

Ending 2017 on a high note


Thanks to strong cement sales in December 2017 (5.9mn tons, +7.7%yoy), domestic cement sales reached 66.5mn tons in 12M17, +7.5%yoy. This is inline with our forecast of 7%yoy growth. Pricing wise, we note that at the level of building material stores, the prices of Tigaroda and Gresik have tended to be flat in January 2018 (+1.2%mom and +0.4%mom, respectively). But while prices seem to be stabilizing, the cement sector is still trading at a lofty valuation of 44.2x 2018F P/E – unjustifiable in our view.

Strong cement sales in December 2017. Domestic cement sales in December 2017 reached 5.9mn tons, +7.7%yoy. Besides the low base in December 2016 (-2.8%yoy), we believe that the strong cement sales growth was supported by improving purchasing power which boosted bagged cement sales in the period. Regionally, we note that Java, Kalimantan, and Nusa Tenggara recorded higher cement sales growth of 11.3%, 9.9%, and 15.5%yoy, respectively. We believe that the improving commodity prices since 4Q17 have had a trickle-down effect and boosted purchasing power - thus lifting sales in the area.

2017 sales grew inline with our estimate.  Cumulatively, domestic cement sales reached 66.5mn tons in 2017, up by 7.5%yoy. This is inline with our estimate (+6%yoy). Including the export sales, we note that total cement sales reached 69.3mn tons, +9.3%yoy. With the tight competition in the domestic market, cement players are looking to boost exports in a bid to maintain the utilization rate. In 2017, total export sales reached 2.8mn tons, +77.2%yoy.

2018: lower domestic cement sales growth, but exports growth will remain stellar. In 2018, we only expect domestic cement sales to grow by 5.0%yoy, lower than in 2017 (+7.5%yoy). This slower growth reflects the expectation of lower growth in bulk cement sales in 2018 given the lower growth in the infrastructure budget allocation in the government’s 2018 state budget (+5.3% in 2018 vs. +44.3% in 2017). Nonetheless, we still expect exports to cushion the total sales growth as we expect the overall industry utilization to only improve to 65.6% in 2018 (from 62.5% in 2017) with the utilization of smaller players still skewed toward the lower end.

Pricing check: flat prices. Based on our channel checks with 8 building material stores in the Greater Jakarta area, we note that the cement prices of Tigaroda and Gresik remain flat on a mom basis (up by 1.2%mom and 0.4%mom, respectively). Meanwhile, based on our channel checks with local distributors, we note that INTP and SMGR plan to increase their prices by IDR500-1,000/sack in January 2018. In our view, the impact of price appreciation will lag at the building material stores.

Fully priced in. The cement sector currently trades at 44.2x 2018F P/E, or near to its +2SD forward trailing P/E or 44.1x - which we believe cannot be justified. While we expect a reversal in the ASP trend to take place in 2H18, we only expect the cement sector to rerate up to +1SD forward trailing P/E.

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