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SMGR - 4Q19 Update

RECOVERY WAS SEEN, BUT SOFT RESULTS AHEAD

In 2019, SMGR recorded a revenue of Rp40.4T, which grew +31.5% (Y/Y) and represented 99.7% of our FY19 estimate. Gross profit reached Rp12.7T, exceeding FY19 estimate supported by sluggish coal price last year, in our view. Despite burdening financial costs stemming from SBI acquisition, SMGR still managed to record a net profit of Rp2.2T (-22.3% Y/Y, 111% of our FY19 estimate).

 

SOFT JANUARY RESULT

January this year, industry domestic cement sales were recorded at 5 million tons, lower than that of 2019 at 5.5 million tons (-8.5% Y/Y). Java cement consumption was reported at 2.9 million tons (-9.6% Y/Y), as Jakarta (-14.1% Y/Y), Banten (-13.5% Y/Y), West Java (-3.8%), Central Java (-10.6%), Yogyakarta (-35.7% Y/Y), and East Java (-7.9% Y/Y) all posted a drop in cement consumption. For SMGR, excluding SBI, domestic cement sales declined to 2.1 million tons from 2.1 million tons (-2.7% Y/Y) in January; but exports grew by a double digit of +20% (Y/Y). TLCC also reported a growth of +24.8% (Y/Y), although domestic sales were lower by -9.3% (Y/Y). 

 

MORE JITTERY

Approaching the end of 1Q20, we see that industry cement sales remained soft although we initially saw a recovery in the 4Q19. In fact, SMGR revenue in 4Q19 rose by +4.0% (Q/Q) or +32.6% (Y/Y) to Rp12.2T, supported by increasing cement sales and ASP – according to our calculation. Yet, we estimate SMGR to post a slightly weaker top line figure of Rp39.3T (-2.5% Y/Y) this year and a net profit of Rp2.3T (-4.4% Y/Y) in the wake of mounting finance expenses. Despite the government’s accomodative policy to cut interest rate, we see that people may curb their spending – especially for properties, which make up around 75% of Indonesia cement consumption – amid global pandemic outbreak. In addition, we think that bulk cement sales will not be as supportive as we initially thought on the possible weak domestic cement demand.

 

On the bright side, however, we expect more new players, if not all, may be more careful in entering the oversupply industry, espcially in the midst of the current situation. Thus, we are confident that SMGR will be able to maintain its market share of 51% (including SBI).

 

VALUATION

We maintain our BUY recommendation with adjusted 12-month target price of Rp12,400/share (previous TP: Rp12,900/share), which is based on EV/EBITDA target multiple of 12.8x at its +1SD. We remain cautious on the possible weaker cement sales results going forward. TP reflects 12-month P/E and P/B of 24.5x and 2.0x, respectively. 

Fri March 20Th, 2020

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