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Danareksa Equity Snapshot - SMGR , 10 Oktober 2019
October 10, 2019 10:05

Semen Indonesia(SMGR IJ)

New branding to reduce costs

 

SBI no longer uses the Holcim brand as its trademark as it was replaced by Dynamix in Sep19. However, SBI had previously signed a USD50.0mn fee agreement to use the brand until the end of Jan2020. Thus, we expect royalty cost savings of 7% to only kick in as of Feb2020. We expect SMIG’s cement sales to grow by 24.7%yoy in FY19 supported by the consolidation with SBI, while we expect 4%yoy growth for domestic sales in 2020. We assume 1.2%yoy and 3.0%yoy ASP growth in 2019 and 2020. We roll over our DCF to arrive at a new TP of IDR17,400. Maintain BUY.

 

Dynamix is the new trademark. Solusi Bangun Indonesia (SBI or SMCB) no longer uses the Holcim brand as it was replaced by Dynamix for all its products in Sep19. Thus, SBI no longer needs to pay the 7% royalty to use the Holcim brand. As such, this should help to improve the gross and operating margins. However, the cost savings may only kick in as of Feb 2020 since based on the transitional services and license agreement (TSLA) signed with Holcim Technology, SBI agreed to pay a USD50mn (~IDR700bn) license fee for the period from 1 Feb 2019 to 31 Jan 2020. The license fee is proportionally charged until the license expires in Feb 2020. The fee is recorded under two accounts: 1) the cost of revenues (USD33.3mn) and 2) general administrative expenses (USD16.7mn).

 

Expecting 24.7%yoy sales growth at the group level in 2019. We expect cement sales volume for Semen Indonesia Group (SMIG) to grow 24.7%yoy in FY19 to 41.34mn tons on the back of consolidation with SBI which started in Feb19. Excluding SBI, the sales volume is expected to decline by 2.5%yoy to 32.32mn tons (FY18: 33.15mn tons) due to the weak sales in 8M19 (19.49mn tons, -6.1%yoy). The sales of SMGR and TLCC (Thang Long Vietnam) in 8M19 are 60.3% of the FY target, or slightly lower than the previous year’s 62.6%. This translates into 3.21mn tons of targeted sales in Sep – Dec19, meaning 3.5%yoy growth. However, we expect lower sales for SBI given this year was a transition year and it will take time for the new brand, Dynamix, to penetrate the market.

 

The transition has dragged down SBI’s FY19 sales. We expect SBI’s sales to reach 9.96mn tons in FY19, down by 15.5%yoy due to the transition and change in trademark. The sales in 8M19 of 6.67mn tons (-2.7%yoy) are 66.9% of the FY target. The realization rate is higher than last year’s rate of 58.2% due to the lower growth target. As such, we expect the average monthly sales in Sep-Dec19 to reach 0.82mn tons, meaning negative growth of 33.2%yoy (avg monthly sales in Sep-Dec18 were 1.23mn tons).

 

Valuation. We roll over our DCF valuation (WACC: 10.6% and TG: 2.0%) to end 2020 to arrive at our new TP of IDR17,400. SMGR trades at USD130.4 EV/ton, or lower than INTP’s USD169.2/ton, while SBI is at USD88.2/ton. SMIG’s production capacity is 46.4% of the national capacity.

 

 

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