Summary
The recent concern about inflation has caused the market and the price of SMGR stock to decline significantly. However, in our view, this situation is not going to prevent SMGR achieving its revenue target, while on the expense side, it still has the capacity to pass on the increase in cost to its customers. The recent dip in SMGR price is evenmore attractive for investor to buy.
Risk Factor
Starting 2011, Indonesia's economy was overshadowed by the threat of rising inflation and possible interest rate hikes in order to anticipate inflation pressures. This is a potential factor inhibiting growth in some sectors such as construction and property as those sectors had been relying on the construction financing through bank loans. Cement is a commodity whose growth is also associated with the development of the construction and property sector. Another challenge is the possibility of rising energy prices this year, along with increase in oil price.
Growth Factor
Despite the above mentioned factors, there are also some positive catalysts that will support growth in the cement sector. Firstly, is the expectation for Indonesian economic growth to reach 6.3% in 2011. Historically, every 1% increase in economic growth will have an impact on increasing cement consumption by 1% -1.5%. This means cement consumption is likely to increase by at least 6% this year.
The second factor is related to the ability of producers to manage cost pressures by passing on the increase cost to customers. The latter should be comfortably done by cement producers due to the oligopolistic nature of this industry (the cement market is concentrated on the 3 national cement producers i.e.s SMGR, INTP and SMCB). As such, we expect the profit margins to be stable amid cost pressures.
SMGR Strategy
SMGR will remain focus on its expansion plans either through construction of new plants or through the acquisition of other cement plants. The working on additional capacity is on the way as SMGR’s production capacity has reached 100% in 2010 at the level of 19.5 million tonnes. Along with the completion of the factories in Tuban and Tonasa the production capacity will increase by 30% to 25 million tons in 2012, which will then sustain the future growth of the company.
Valuation
Negative trading sentiment on the stock exchange due to the above negative factors, has caused the significant decline in the SMGR price, and is currently traded at 9x 2012 PE. This makes the valuations evenmore attractive for long-term investors. Historically, SMGR was traded in the range of 18X PE. The improved level of risk tolerance on the global and domestic market is expected to push this stock valuation back to normal levels in the long term. Using a blended valuation method (DCF, PE, EV/ton, EV/EBITFA), SMGR fair price would be at Rp. 11 300. BUY
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