SMGR Building Up Capacity - Indopremier Securities

Maximum utilization and delayed capacity addition hamper volume growth for the next two years. The company initiates master plan to increase capacity by 56% for the next five years. However, facing with increase in infrastructure projects this year, SMGR is quite likely to lose market share. Valuation-wise, SMGR is offering 31.2% upside potential in cement sector.

Additional 5 MT capacity in two years, to reach 30.5 MT in 2015
SMGR has delayed to add capacity and operated with 90s% capacity since 2005. With anticipated growth in infrastructure and property spending, the management finally launched two long-awaited projects this year to increase capacity in Gresik and Tonasa cement plants by 2.5 MT each in 2012. Further, with grand target to reach 30.5 MT of capacity in 2015, the company is also assessing new cement plants construction in Mid Java and Sumatra planned to be launched in 2012 with capacity of 2.5 MT each as well. However, with lag in additional capacity, we forecast a 3% reduction in domestic market share over the next two years.

Possible acquisition of Semen Baturaja will have marginal effect
Possible additional capacity might be realized in near term with acquisition of Semen Baturaja, yet the effect will be marginal. Additional capacity will be increased by 1.2 MT of capacity to reach 20.7 MT in total and net income will increase by approximately Rp. 200 billion.

Offering the most upside potential in cement sector
Soaring oil and coal price will lead to additional ASP increase from cement producer. With limited volume growth due to capacity restraint, in FY11 we forecast 9% ASP increase from Semen Gresik, higher than its peers, but merely 4% increase in volume. Higher level of growth in volume will be realized either in FY13 through new plants or immediately through acquisition of Semen Baturaja. Our assumption produces price per share of Rp. 11,150 representing 31.2% upside, 17.51x FY11E PER and 16.64x FY12E PER.