SMGR Stable 2011 With Bright Outlook Afterward - AAA

Semen Gresik group reported its 1Q11 performance with 9% increase in revenue YoY and stable net profit margin at 25%. While opportunities abound, limited production capacity will be the main reason behind SMGR’s limited revenue growth in 2011. As capacity being added, which will be finalized in 2012, we can only expect a stable 2011 for SMGR. From then on, SMGR can go at a full speed in taking advantage of Indonesia’s economic growth, especially in outer Java when mining and plantation sectors grow robustly and where infrastructure development is most needed. Our valuation using blended method, DCF, EV/Ton, and PER results in a target price of Rp11,300. BUY.

± Limited revenue growth with stable net profit margin
The increase in revenue to Rp3.5 trillion were due to 2% higher sales volume YoY to reach 4.3 million tonnes and an increase in average selling prices by 7% YoY to USD818.7/ton or Rp 40.935/sack. The breakdown of the sales volume increase is as follow: Tonasa plant +9% YoY to 0,8 million tonnes, Padang plant +5% YoY to 1,3 million tonnes while Tuban -2% YoY to 2.2 million tones, the latter was due to stiffer competition in Java and limited capacity. Although revenue increased, SMGR’s market share went down slightly by 1% to 40%, as its competitors benefit from constrained capacity experienced by SMGR.

± Manageable costs
SMGR managed its cost fairly efficiently, as can be seen from its relatively sustained 1Q11 Gross Profit Margin and Operating Profit Margin of 46% and 30% respectively. The increase in manufacturing costs was caused by higher energy and electricity costs. In order to manage the rising energy costs, SMGR is now mixing lower caloric coal in its power source. As such, net profit margin could be maintained at 25% YoY to reach Rp871 bn.

± Opportunities Abound
SMGR is now working to finalize adding capacities to its Tuban and Tonasa plants. Each plant will add about 2.5 million tons per annum. After finalization, the total installed capacity will increase to 25 million tons per annum from currently 20.5 million tons. The completion of Tuban IV and Tonasa plants in 2012 will certainly be the key factor that will push growth in the near future. Furthermore, optimistic view on Indonesian economic growth along with its bottleneck problems in infrastructure development provides a suitable climate for SMGR’s growth.

± Valuation
As volume is limited by production capacity that has reached 100%, the only thing that could contribute to higher sales in 2011 is an increase in selling price. However, considering additional new production capacity with the support of economic growth 2012 onwards, SMGR performance is expected to be good. By using a blended valuation method (DCF, EV/Ton, PER), we arrived at a target price of Rp11,300 and recommend BUY.