Semen Gresik - Least earnings revision risk, maintain OW - JP Morgan

• SMGR earnings are in line with consensus, slightly above ours.
SMGR reported FY10 earnings of Rp3.6tr, in line with consensus and 5% above our estimate. We expect consensus not to revise its FY11-12 earning estimate for SMGR post the FY10 earnings announcement. SMGR's FY10 earning is above our estimate due to better-than-expected tax rate of 23% versus our estimate of 25%.

• 4Q10 net earnings of Rp1.1tr, up by 21% y/y and 24% q/q.
4Q10 earnings are better-than-expected tax rate in 4Q10 as SMGR took the lower tax rate benefit from the higher public float in the market. The company’s EBIT margin was relatively flat at 32% in the last two quarters. We expect 29% EBIT margin compression in FY11 on the back of rising costs. Our FY11E earning forecast is 5% below consensus estimate as we are more conservative on margin.

• Ex-Java demand should improve.
SMGR's 2M11 cement sales was only up by 2% y/y, slightly below our expectation of 5% y/y growth. In the last two months, strongest cement sales growth was seen more in Jakarta, Yogyakarta and West Java (SMCB and INTP’s home market). Following positive commodity price, we believe that ex-Java demand, which only grew by 3% y/y versus Java demand which grew by 11% y/y, should improve its cement sales momentum.

• Least earnings revision risk, maintain OW.
We believe SMGR has the least earnings revision risk post FY10 earnings announcement, compared to its peers. We expect the share price to slightly outperform its peers post FY10 earnings result announcement. We maintain OW with Dec-11 PT of Rp9,600 (DCF based, WACC: 13.7% and TG: 5%). Key risks on our estimate (1) Volatility in rupiah and energy costs, (2) weaker-than-expected cement sales growth.