Semen Indonesia Earnings Growth Cools As Costs Rise

SMGR reported robust FY13 sales while its market share rose to 43.9% in Dec 2013 vs Dec 2012’s 40.9%. However, FY14F earnings growth may be slower than originally estimated due to higher electricity costs. As we foresee a time lag between the increasing input cost and a hike in its selling prices, we cut our FY14-15F earnings forecasts to IDR6.2trn and IDR7.6trn (-1.0% and -0.5% y-o-y). We also lower our TP to IDR16,700, implying 16.0-13.1x FY14-15F P/Es. Maintain BUY.

Robust FY13 sales
SMGR’s sales expanded 14.3% y-o-y to 25.8m tonnes – faster than national sales which grew just 6.2% y-o-y thanks to Indonesia’s large unutilised capacity. SMGR’s capacity utilisation rate, in our calculation, was at 92%. If our numbers include Than Long Cement (TLC) – in which it owns a majority stake – its utilisation rate would be at 85%. This is much lower than the national rate, which is at ~96%.

Given its large unutilised capacity, we see SMGR being the biggest beneficiary of an increase in cement demand. We are positive on the outlook for domestic cement, as higher demand will be driven by projects to build the monorail, mass rapid transit, seaport and other public infrastructure. Domestic cement players will benefit from the new policy on the limitation of cement imports.

Higher costs partially offset by price hike
The electricity tariff for companies under the Industrial Group 4 class – which includes cement players – will surge 64.7% this year (13.3% for every two months, starting from May). Electricity costs make up ~16% of SMGR’s cost of goods sold (COGS). Our calculations show that a higher electricity tariff would increase COGS by 0.4-0.9% in FY14-15F. If SMGR does not increase its selling prices, its GPM will decline to 46.2-46.7% (-50bps and -60bps) in FY14-15F.

However, since the domestic cement market is controlled by an oligopoly, we think that cement makers could pass on the higher costs to clients by raising selling prices, although there may be a time lag between the cost increase and price hike.

Trimming earnings and TP, BUY
We cut our FY14-15F earnings by IDR6.2trn and IDR7.6trn (-1.0% and -0.5%) respectively, and expect its y-o-y selling prices to tick up 3% in FY14F and 1.5% in FY15F. We also lower our TP to IDR16,700, which implies 16.0-13.1x FY14F-15F P/Es. SMGR is trading at 1.1-0.8x FY14-15F PEGs, while its closest peer Indocement (INTP IJ, BUY, TP: IDR24,500) trades at 1.2-0.9x FY14-15F PEGs. SMGR offers the highest ROEs and dividend yields in the sector.

Growing faster than its peers
SMGR’s FY13 sales hit 25.8m tonnes (+14.3% y-o-y), in line with our estimates. This was much faster than the national numbers, which rose by only 6.2% y-o-y to 58.6m tones. The company’s sales growth was driven by higher cement sales from non-major markets like Western Java (Jakarta, Banten, and West Java provinces) and Central Java. In FY13, Western Java sales rose 22.7% y-o-y to 4.5m tonnes, while that of Central Java grew 21.6% y-o-y to 2.6m tonnes.

In the same period, its market shares in Western Java and Central Java increased to 17.8% (from 16.4% in FY12) and 37.8% (from 34.6%) respectively. It is worth noting that SMGR’s shares in main markets such as East Java, Sumatra, Kalimantan and Sulawesi also improved.

On a m-o-m basis, SMGR’s domestic market share still rose to 43.9% in Dec 2013 from 43.8% in Nov 2013 at the expense of Indocement (INTP IJ, BUY, TP: IDR24,500), whose market share dipped to 30.4% from 30.5% over the corresponding period. Meanwhile, Holcim Indonesia (SMCB IJ, NR)’s market share was maintained at 14.5%.

Raising selling price may partially offset higher costs
Perusahaan Listrik Negara (PLN) will gradually increase the electricity tariff every two months, from May until December 2014. The tariff for companies in the Industrial Group 4 classification – which includes cement makers – will surge by 64.7% (13.3% for every two months).

According to our calculation, electricity costs account for ~16% of SMGR’s COGS
Hence, a higher electricity tariff should increase COGS by 0.4-0.9% in FY14-15F. FY14-15F gross profit margin (GPM) should decline to 46.2% and 46.7% (-50bps and -60bps) respectively if it does not increase its selling prices. We believe SMGR would not find it difficult to pass on higher costs to customers since the Indonesian cement market is controlled by an oligopoly. However, there is likely to be a time lag between the cost increase and price hike, in order to maintain robust domestic cement sales volume.

To reduce its electricity costs, SMGR is installing the waste heat recovery generation (WHRPG) system, which will generate electricity from heat in its Tuban plant. This equipment, estimated to commence operation in 2Q15, will reduce electricity costs.

Lowering earnings estimates and TP
We pare our FY14-15F earnings to IDR6.2trn (-1.0%) and IDR7.6trn (-0.5%) respectively. We also expect SMGR to increase its selling prices by 3% y-o-y in FY14 and 1.5% y-o-y in FY15F. While our FY14F selling price hike is in line with management’s guidance, we are more conservative on the price increase in FY15F, since INTP and SMCB are expected to increase their production capacities in mid-2014.

We also lower our TP to IDR16,700, which implies 16.0-13.1x FY14-15F P/Es
SMGR is trading at 14.4-12.1x FY14-15F P/Es – slightly higher than its closest peer, INTP, which is trading at 13.3-11.4x FY14-15F P/Es. However, in terms of growth, dividend yield and ROE, SMGR is more attractive. The group is trading at 1.1-0.8x FY14-15F PEGs, while its closest peers are trading at 1.2-0.9x FY14-15F PEGs. Furthermore, SMGR provides the highest ROE and dividend yields, at 28.0-28.4% and 3.1-3.5% in FY14F and FY15F respectively. We maintain our BUY recommendation on the stock.