Steel Pipe Industry A Quality Undervalued Stock

Company background
Established in 1971, Steel Pipe Industry of Indonesia (Spindo) is the biggest player in the domestic steel pipe industry with market share of more than 30%. Being a company that provides a wide range of pipes for various industries, Spindo is in a position to ride along with the growth in the construction, gas pipes and automotive industries. The company employs about 1,250 people and owns six modern plants in East and West Java. The quality of Spindo’s products conforms to international standards and worldwide certifications, making its product positioning on par with international offerings.

Beneficiary of rising infrastructure
Spindo benefits from the rise in demand for construction and infrastructure pipes, which are supported by the execution of Indonesia’s 15-year economic masterplan (the Masterplan for Acceleration and Expansion of Indonesia’s Economic Development or MP3EI) projects. It also benefits from massive investment in the automotive parts industry and increasing local content requirements.

2013 earnings growth mostly driven by higher-margin sales mix
Spindo’s 2013 net profit increased 82.8% y-o-y to IDR204bn. This was mainly on a 14.3% y-o-y increase in revenue to IDR3.5trn and improved gross margins of 17.1% (2012: 13.0%). The latter was due to a better sales mix brought about due to an increase in contributions from the higher margin oil and gas pipe sales. This business segment contributed 18% to 2013 revenue vs 6% in 2012.

Undervalued stock
With 2014 annualised P/E at 3x and ROE at 16%, as well as further growth exposure from being a proxy to the growth in various industries, we see Spindo as very undervalued. Key risks are: i) project delays, ii) high raw material costs fluctuations, and iii) the high volatility of the IDR vs the USD.

Spindo is the largest player in the local steel pipe industry with a market share of >30%. The stock is a proxy to the growth in the construction, gas infrastructure and automotive segments. With annualised 2014 P/E at 3x and ROE at 16% – with further growth exposure as proxy to the aforementioned sectors – we see the stock as very undervalued and highly worthy of investors’ attention.