Semen Gresik, New Engines to Drive Growth

Progress at Tuban IV development
Construction on the Tuban IV–East Java cement plant is slightly ahead of schedule. The cooling tower is nearing completion while the clinker storage is now being built and machines and equipment delivered to the site. SMGR bought machineries such as crushers from reputed companies such as Thysenkrupp Fordentechnik, raw mill, kilns, pre-heaters, coolers, and coal mills from FLS Midth and electrical equipment from Loesche. Overall, the Tuban IV plant was 55.8% completed as of 15 Nov 2010. Management had targeted for 71.3% completion by end-2010.

Development of Tonasa V plant on track
Management guided that the progress of development of its new cement plant in Sulawesi’s Tonasa V is also on track. The plant was 62.9% completed as of 15 Nov 2010 while works on its 2x35MW power plant is 8.9% done. The company had targeted for works on the cement and power plants to be 72.9% and 17.3% complete respectively by end-2010.

Blended costs to come down on commencement
We see average production costs trending lower after the new cement plant commences as scheduled in early 2012. The capacity of the new cement plant of 5.0m tonnes is equivalent to 26.3% of the group’s existing capacity. Currently, SMGR’s most efficient production is from its Tuban plant, owing to its more advanced technology.

All machinery at the Tuban plant were bought in the mid-1990s while SMGR’s other plants are still equipped with machines bought in the 70/80s. As a result, the production cost is much lower at Tuban than at SMGR’s other plants’, with the Tuban plant’s COGS at Rp342.7k/ton vs the average SMGR plant’s Rp416.3k/ton.

Buy, TP Rp12,500
At our target price of Rp12,500, the counter will be trading at 16.8-13.5x FY11-12f PE. SMGR is trading at 12.5-9.9x FY11-12f PE, which is at an unjustified discount to its peer average of 14.0-11.4x FY11-12f PE. SMGR offers the sector’s highest equity-return, with ROE of 31.2% beating vs the sector average of 27.4%.