SMCB:All-round improvement - Mandiri

We switched our recommendation from Neutral to Buy on SMCB, with TP Rp2,500/share. This is on the back of the company’s improved efficiency in cost following recent conversion of coal used in production that now comprises of up to 85% in low calorie coal (vs. 2010 of 50%). In the meantime, cash-cycle days was also noted to continue improving to 33 days (vs. Des10 of 40 days), suggesting serious efforts taken in widening its source of growth. While the stock is offering the cheapest EV/ton of US$239, we forecast SMCB to grow the highest among peers in 2012 (26.4% yoy), to benefit from the progress in infrastructure works. During 4M11, SMCB’s cumulative bulk sales have grown by 67.1% yoy.

Low rank coal is 85% of coal use. Amid the below-than-consensus 1Q11 results, SMCB claimed that the 17.5% COGS/ton hike experienced during the quarter was more of a result of the move forward schedule in machine maintenance shutdown that normally in Q2. Cost pressure is expected to ease in the remaining quarters due to lower coal cost pickup, as 85% of the 1.5 tons coal required for production is now low-ranked one (vs. 50% as at end 2010). The further coal conversion is positive, especially in anticipating volatility of coal prices going forward. Coal contributes about 14% of total COGS in our FY11F.

Cash cycle days further improved to 33 days. On the other hand, we also spotted further improvement in the company’s cash-cycle days to 33 days vs. 40 days in Dec10. This continued to be ahead of its peers, including INTP and SMGR, whose cycles are 50 and 74 days, respectively. The company said that such effort has been taken seriously in order to improve its working capital management. As mentioned in our earlier notes, just in-time delivery improvement and installation of a new control room covering fleet operations to and from the Narogong plant, West Java were few of the main keys to this. 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.

Strengthening market position. While SMCB has been the benefactor of progress of infrastructure works and major property construction, SMCB is also strengthening its presence in Sumatera area through the construction of 3 cement silos that are planned to be ready by end 2011. SMCB has been steadily increasing its market share in Sumatera from only 7.2% in 2008 to 11.3% at end of Apr11.

Lowest EV/ton, with attractive growth, Buy. While the stock offers the lowest EV/ton of US$239 (INTP: US$384; SMGR: US$293), we forecast SMCB to grow the highest (26.4% yoy) among its peers in 2012 (INTP: 24.7% yoy; SMGR: 19.5% yoy), benefiting from the progress in domestic infrastructure works and stronger position in Sumatera area. Buy at TP Rp2,500/share (+16.3% upside).