Semen Gresik, Massive Capacity on The Horizon

New cement plants to commence operation
SMGR’s two cement plants – located in Tuban, East Java and Tonasa, South Sulawesi – are expected to commence operations in early-2012. These new cement plants’ combined capacity stands at 5.0m tonnes, which is equivalent to 24.3% of SMGR’s existing capacity. It plans to increase its production capacity to 24m tonnes p.a. in 2012 and 27m tonnes p.a. in 2013, from the currently 20.5m tonnes p.a., thus boosting revenue growth considerably. Notably, SMGR’s revenue has stayed flat in the last two years, owing to limited production capacity.

Blended costs lower after commencement of plants
We see average production costs heading lower after the commencement of the new cement plants. At the moment, the Tuban plants, which utilize better technology, offer the most efficient cement production for SMGR. All machines in the Tuban plants are relatively new since they were bought in the mid-1990s, compared to other SMGR plants which are still equipped with machines bought in the 1970s/1980s.

As a result, the production cost at Tuban plants is much lower than that of other plants – as a comparison, the COGS for Tuban plants is IDR342.7k/tonne, while that for an average non-Tuban SMGR plant is IDR416.3k/tonne.

Biggest beneficiary of high cement demand outside Java
Given its diversified market base, SMGR stands to reap the most benefits from strong cement demand in Sumatra, Kalimantan, and Sulawesi, with market shares of 42.4%, 48.4%, and 61.1% respectively – which are way above its nearest competitor, Indocement’s 16.0%, 28.4%, and 13.7%. In the next 10 years, cement demand outside Java is estimated to expand at a CAGR of 8.3%, compared with Java’s CAGR of 4.4%.

BUY, TP at IDR12,500
Our Target Price is IDR12,500, at which the counter would be trading at 15.7x–13.4x FY12–FY13f PER. SMGR is trading at 11.5x–9.8x FY12–FY13f PER, which represents an unjustified discount to its peers which are trading on average at 12.4x–10.9x FY12–FY13f PER. To top it up, SMGR also provides the highest return on equity for the sector (SMGR’s ROE of 30.2% vs the sector’s average 25.7%).