Indocement, Beneficiary of Rising Demand

Catering to Jakarta demand
Given its huge unutilized capacity, INTP is in a good position to reap the most benefit from increasing cement demand. Most of its plants are located in Citeureup in West Java, which is close to Jakarta. The Jakarta government has plans to carry out massive infrastructure projects, and has started constructing two flyovers totaling 7.2km connecting Cipete-Blok M and Tanah Abang-Kampung Melayu. It will also construct a 15.5km railway for mass rapid transit (MRT) stage-1, connecting Lebak Bulus–Hotel Indonesia, which will begin by end-2011.

Strong presence outside Java too
Besides a strong presence in Jakarta, Indocement also has a strong reach outside Java, supported by its cement plant in Palimanan, West Java and Tarjun in South Kalimantan. We believe cement consumption in Sumatra, Kalimantan, and Sulawesi will remain high, in line with spiraling prices of commodities such as coal, palm oil, rubber and cocoa.

Additional engines
The company’s new cement mill in Palimanan commenced operation at end-August last year. This mill has an annual capacity of 1.5m tonnes, equivalent to 8.1% of total capacity. With the new capacity, INTP’s production capacity has risen to 18.6m tonnes per annum, with 28.5% of capacity unutilized. Next year, INTP will build new cement mills with an annual capacity of 2m tonnes in Citeureup.

BUY
We recommend a BUY, with a target price of Rp20,000, at which the counter will be traded at 21.0-18.9x 2010-11f earnings. The stock’s catalysts include the implementation of more infrastructure projects, which will create spillover effects on domestic cement consumption.