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Danareksa Equity Snapshot – Cement Sector (NEUTRAL) The price war looks to be over – for now | November 23, 2018 10:10

Maria Renata

We believe that SMGR’s acquisition of Holcim Indonesia will create market consolidation which, in turn, may lead to more stable/firmer cement selling prices. However, the truce in the price war could be broken at any time given the desire of the small players, especially from China, to attain ~20% market share in an industry with 40% idle capacity. We also see that the uptrend in interest rates may dampen demand to a certain extent. We remain Neutral on the sector and have a BUY call on SMGR and a HOLD call on INTP.

The two biggest players now control 70% of the capacity. The cement industry has started to undergo consolidation through SMGR’s acquisition of Holcim Indonesia (SMCB). Post-acquisition, SMGR and INTP will control ~70% of the capacity and have market share of ~80%, with the remainder divided among another 12 players. The higher market concentration should lead to more stable/firmer cement selling prices.

Do unfulfilled ambitions pose a threat? We realize that many cement companies were eager to acquire Holcim, including Chinese players. The Chinese players had targeted market share of ~20% when they entered Indonesia and the acquisition of Holcim would have provided them with 15% market share. However, given that they failed to acquire Holcim in addition to the industry’s idle capacity of ~40%, we remain concerned that the truce in the price war could be broken at any time.

We expect 5%yoy growth in ASP in 2019. Previously, we factored in the potential market consolidation by anticipating 3.5%yoy growth in ASP in 2019. However, given that SMGR has acquired Holcim, we see that there is greater potential for price increases. Hence, we upgrade our ASP growth assumption to 5.0%yoy for both SMGR and INTP. In terms of sales volume, we forecast 4-5%yoy growth in 2019. Given this, we now expect the 2019 revenues to grow by 8.7%yoy for SMGR and by 9.1%yoy for INTP. We have not included SMGR’s acquisition of Holcim in our forecast.

Cement sales in 10M18. Domestic cement sales reached 57.0mn tons in 10M18, +5.1%yoy (10M17: 54.2mn tons). SMGR’s market share reached 39.4% and INTP’s 25.7%. SMGR’s sales in 10M18 reached 26.8mn tons, +4.0%yoy, supported by strong exports and TLCC sales. The export sales contributed 8.3% of the 10M sales, while TLCC sales contributed 8.0%. SMGR’s sales in Oct 18 of 3.39mn tons are up 7.8%yoy and +9.7%mom. Meanwhile, INTP booked 10M18 sales of 14.64mn tons, +6.2%yoy. Its sales in Oct18 reached 1.77mn tons, +5.8%yoy and +6.5%mom.

Valuation. We maintain our BUY call on SMGR and HOLD call on INTP. We arrive at a new TP of IDR13,500 for SMGR (old: IDR11,800) and IDR18,700 for INTP (old : IDR15,700). SMGR is trading at 20.3x 2019 PE, slightly above its historical 4-year average PE of 19.0x. INTP, meanwhile, is trading at 66.5x 2019 PE, above its historical +1SD PE of 61.7x. Furthermore, SMGR’s EV/ton stands at USD145.6/ton, while INTP’s is at USD190.6/ton and SMCB’s is at USD102.4/ton (1USD: IDR14,580).

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