Cement Sector Update - Mighty May - Bahana

Strong cement consumption on target to surpass our full-year figure
The Indonesian Cement Association revealed May 2011 total cement consumption of 4.15m tons (+9.1%m-m, +19.5% y-y), consisting of domestic consumption of 4.08m tons (+9.3% m-m, +24.8% y-y) and exports of 63,485 tons (-5.6% m-m, -67.9% y-y). This brought ytd domestic consumption to 18.39m tons (+13.5 y-y), accounting for approximately 42% of our FY2011 estimate. As 2H consumption tends to be higher than 1H, 2011 cement volumes are likely to surpass our expectation. Based on the same 26 working days in April and May, the average daily volume showed more than 9% improvement from 143,623tons to 157,034tons respectively.
Growth across all regions, except Sulawesi and East Indonesia

May’s cement consumption in Java grew 11.7% m-m or 28.3% y-y to 2.26m tons, bringing 5M11 volumes to 10.02m tons (+17.1% y-y) and accounting for approximately 54% of total domestic consumption (vis-à-vis 53% a year earlier). All regions within Java displayed consumption uptrend with the strongest growth coming from Central Java (+15.8% m-m, +30.9% y-y). In contrast, Sulawesi and East of Indonesia were the only 2 regions that displayed contraction in consumption. The resource-based regions like Sumatra and Kalimantan booked growth of +15.3% m-m or +31.1% y-y to 1.32m tons, accounting for approximately two-thirds of Outer Java’s demand.

INTP: Moving in line with the industry’s growth
INTP registered +8.0% m-m or +23.2% y-y in domestic consumption, bringing ytd volume of 5.70m tons (+13.6% y-y) and moving in line with the industry’s growth. 5M11 volumes accounted for approximately 41.9% of our FY2011 estimate of 13.6m tons. With ample production capacity, INTP is likely to continue benefiting from growing domestic cement consumption, particularly for the Java market. However, this is progress has been reflected in INTP’s 2.9% ytd market outperformance, which brought valuation to 7.1% premium to the sector’s 2011 P/E of 15.4x. Hence, at current levels, we see limited upside of less than 10% on the counter given our target price of IDR18,400. Hence, we suggest investors to accumulate on weakness.

SMGR: 19% upside potential on early 2012 capacity increase
SMGR experienced acceleration on its May domestic volume, which grew +10.0% y-y and +25.5% y-y. This brought ytd volume growth to 8.8% y-y to 7.60m tons, accounting for approximately 40.4% of our 2011 full-year estimate of 18.8m tons. As we inch closer to towards the 2H, we see some excitement on SMGR’s outlook given the construction of its 2 new mills (Tuban, East Java and Tonasa, Sulawesi), which would bring additional 5m tons annual capacity. Note that the completion stage is on schedule with production slotted for early 2012. This means that production constraint in SMGR will no longer be an issue, allowing for improved earnings growth going forward on higher volumes. Our target price of IDR11,200 implies 2011 implied P/E of 17.0x and 19% upside potential. BUY.