Indonesia cement – a fresh re-look into the investment thesis - JP Morgan

Liliana Bambang (analyst) has updated her earnings forecasts and thoughts on INTP and SMGR. She downgrades INTP from O/W to Neutral, after trimming her FY11-12 EPS by 10% and 12% (10% below consensus FY11). She maintains SMGR as O/W but trims her FY11-12 EPS by 5% and 1% (9% below consensus FY11). Liliana’s inclination is to play defense with the cement stocks (ie: wait), as she thinks the government’s plan to remove fuel subsidy might become an overhang for the stock.

My personal thoughts on the cement stocks:

* Earnings downgrade already priced-in by the market. On page 18 of the report, the P/E band for SMGR shows unwarranted de-rating based on the lowered EPS forecast. If SMGR can mean revert to 13x forward P/E, the stock can recover to Rp10,200 or 20% upside.

* Industry volume growth forecast conservative relative to last GDP report. Indonesia’s fourth quarter real GDP came in as stronger than expected, rising 6.9%oya and up 7.5%q/q, saar (J.P. Morgan 5.5%oya, consensus 6.5%oya). From 2007-08 period, we saw that two consecutive years of solid GDP growth (6.3% in 2007 and 6.1% in 2008) resulted in strong industry volume growth, especially in the second year (6.9% in 2007 and 11.4% in 2008). Liliana currently forecasts slowing industry volume growth, from 6.3% in 2010 to 4.8% in 2011 (despite consensus GDP forecast showing economic acceleration, and despite the rainy 2010 as the base).

* Buy Semen Gresik (SMGR). Bottom-up, it appears that the market has not fully priced-in the likely commissioning of SMGR’s new cement capacity in 2011-12. Even on Liliana’s lowered EPS number, SMGR looks attractive on 13x FY11 with 21% EPS growth forecast for FY12 (vs INTP on 15x FY11 with 12% EPS growth in FY12).