Steel Pipe Industry Slightly Below Our Expectation

3Q14 net profit increased 13.3% q-o-q to IDR48bn, bringing 9M14 bottom line to IDR176bn (+22.5% y-o-y), comprising 67% to our FY14 forecast. 4Q14 earnings to pick up given seasonality factors derived from the construction sector yet not adequate to reach our FY14 target. Thus, we slightly cut 2014 earnings by 4% following the results but maintain 2015’s. The pipe industry remains attractive with Gresik project as strong catalyst. Maintain our BUY call and TP of IDR370.

Financial highlights
3Q14 revenue was flat (0% q-o-q) at IDR772bn and gross margin stagnant at 17.5% vs 17.4% in 2Q14. However opex declined 51.2% q-o-q mainly due to lower export & freight costs from the 2Q’s high base. This pushes operating profit to IDR103bn (+46.6%) and crank up 3Q14 operating margin to 13.3% from 9.1% in 2Q14. Spindo suffered higher forex loss of IDR21bn in 3Q14 compared to IDR2bn in 2Q14 due to IDR currency weakening.

Relatively stable gearing level
Cash balance declined to IDR121bn in 3Q14 compared to IDR184bn in 2Q14 bringing 3Q14 net gearing to 61.3% compared 59.5% in 2Q14. 3Q14 receivables collection (83 days) and inventory turnover (208days) were relatively stable on a q-o-q basis. 3Q14 trade payable days went up to 62 days from 46 days, however still below historical quarter levels at 68-99 days.

4Q14 revenue should pick up q-o-q, yet still below our expectation
Analyzing on a seasonality basis, 4Q13 revenue accounted 34% of FY13 revenue actualization given the peak season in 4Q13 arising from the construction sector. Note that around 50% of Spindo’s revenue comes from the construction industry. We expect last year’s seasonality to be relatively similar with 4Q14. However, we still have to cut 2014’s earnings by 4% as we slightly cut our sales volume growth assumption.

Valuation
Despite the earnings cut, the stock is still cheap as it is currently trading at 7.8x and 5.1x 2014-15 P/E assumptions. The Gresik plant project which is expected to commence in 2016 (mainly to produce O&G pipes) is a strong upside risk. We have not factored in fully this project to our DCF-based valuation. We maintain our BUY call and TP of IDR370, implying 7x 2015 PER.