SMCB:Widening source of growth - Mandiri

Amid disappointing FY10 results, we found interesting hidden story in SMCB’s balance sheet. Retained earnings were polished, cash was enriched where this was rooted from company’s recent quasi-reorganization, coupled with improvement in its asset efficiency, including receivable and payable management. We see serious efforts taken by SMCB to expand its source of growth. Although, we feel that this hasn’t been fully optimized, looking at minimal margin improvement in 2010, which raised question regarding efficiency in its production cost. As cost pressures are lingering due to further accelerating commodity prices to date, while SMCB has always been the late runner in terms of raising ASP, we are concerned higher sales volume may not be able to offset this. At this juncture, we stay Neutral on SMCB.

Flat FY10 operating profit due to different sales area proportion. Flat operating profit was booked by SMCB in its FY10 result. This came following lower domestic ASP (-1.8% yoy) albeit 6.1% growth in the domestic sales volume. Sales area proportion difference was the main reason to this, evidenced by higher growth shown in ex-Java area (+45% yoy) that has relatively lower ASP than its main area (Jakarta and West Java).

Bigger room to grow, given healthier balance sheet. However, we appreciate SMCB’s serious effort to expand its growth source. The recent quasi reorganization has ultimately provided the company a room to grow especially in search for funding support, especially for its upcoming US$400mn new Tuban plant. We also noticed continuous improvement in receivable and payable management that reached its best level in the past 5 years. Receivable day was reduced to its lowest level of 36 days, while, payable day returned to its highest level of 28 days. SMCB said just in-time delivery improvement and installation of a new control room covering fleet operations to and from the Narogong plant, West Java was the main key. Hence, cash cycle was maintained at its low level of 57 days and we see this should be improving given recent extra supply of distribution centers in both rural and urban areas by the company. We estimate potential cash extra of up to Rp200bn with the best scenario receivable and inventory improvement of 22 days (SMGR’s historical lowest turnover) and 37 days, respectively, which we think can be used for debt repayment or dividend payment

Concern lies on production efficiency, maintain Neutral. Yet, concern lies on effort relating to its production cost efficiency, given pent-up margin improvement in 2010. We think SMCB should convince us on this, especially in facing 2011 when margin will likely be shrinking due to continued higher energy costs. Upside risk remains given the progress in the infrastructure works, especially in Jakarta, which has been SMCB’s main area. SMCB is trading at PE11F 18x and EV/ton US$228.