Steel Pipe Industry East Java Site Visit Trip Update

On 19 September 2014 we held a 1-day site visit trip with investors to four of Spindo’s East Java plants which contributes 81% of its production capacity in 1H14. We were able to see how the new Sidoarjo plant operates so efficiently relative to its older plants. This arise our confidence in Spindo’s commitment in cost efficiency attempts. This enables Spindo to be more price competitive going forward. We maintain our DCF-based derived TP of IDR370 with a BUY call.

East Java site visit trip update
We arrived at Juanda Airport, Surabaya, and took a bus to Pasuruan Sidoarjo, Warugunung and Rungkut plant. Although most of the plants (excluding Sidoarjo) are 33 year old, we see that the plants are very well maintained and the workers seem to be very professional. The plants only need few well-round workers as they can shift roles. Note that electricity and direct labor costs only account 2-3% of production cost.

Sidoarjo plant a testament to cost efficiency
We visited Spindo’s new Sidoarjo plant (7% of production capacity) which commenced in April 2014. We saw the beginning-end proceess (raw material-finished product) were more cost efficient (operating+maintenance costs) compared to the older plants. We expect this should reduce the manufacturing expenses which contributes ~13-16% of its cost of sales.

Well-known brand and advanced quality control
From our observation, we get a sense that Spindo’s products are relative premium compared to its competitors in terms of quality and reliability. This is seen from its assurance that its steel pipe products have to pass the quality screening tests in their lab before delivered to its final customers.

Increasing IDR currency raw materials
Based on latest update, Spindo is expected to purchase more raw material from Krakatau Steel (KRAS IJ, Not Rated) contributing 40% of raw material purchases ytd 2014 from 17% and 30% in 2013 and 1H14. This should reduce forex exposure as most of Spindo’s products are sold in IDR.

Still plenty of upside to our TP
Share price has increased 55% Ever since our initiation report a month ago. Yet, we suggest there is plenty of upside to our DCF-based derived TP of IDR370, implying 7x 2015 PER. Key risks: raw material cost, USD/IDR volatility, project delays.