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Rabu, 08 Juni 2011

Semen Gresik (SMGR IJ, Rp 9,550 BUY) On the right track - Danareksa

Expansion on schedule
In our last visit to the company, the management gave assurances that the construction of the 2 x 2.5mn tonne new plants are on schedule. It seems likely that both plants - one in Pangkep, South Sulawesi and the other in Tuban, East Java - will be completed in early 2012. Some Rp4.0-5.0tr has been spent on capex so far, or representing around 65-80% of the total capex. For this year alone, the total capex is budgeted at around Rp1.4tr - including capex for the expansion. If things go according to schedule, both plants should commence trial operation early next year. The Tonasa plant will be equipped with a 35MW coal fired power generator from Kawasaki of Japan although construction is a bit behind schedule due to the lengthy negotiation process. In the early stage of its trial operation, the Tonasa plant will use a rented power generator from PLN. Meanwhile, the Tuban plant will utilize power from the national grid.

Weak 1Q11 for three reasons
Semen Gresik has shown relatively poor performance compared to its rivals. Whilst the domestic sales volume growth of its competitors has reached double digits, Semen Gresik lagged far behind with sales volume growth of only 1.4% in 1Q11. Despite its capacity constraints, Semen Gresik’s volume growth can still be considered as low. According to Semen Gresik there are three reasons for this: 1) higher than normal rainfall in East Java, 2) the company is still in the learning process for using the new equipment installed last year, and 3) data glitches as Semen Gresik switched its data management system to SAP. However, things have improved and up to April 2011, Semen Gresik reported sales volume growth of 4.7% yoy to 5.9mn tonnes.

Reducing clinker content
Clinkers are the most expensive ingredient in cement production as they consume most of the energy required. In type I cement, known as Ordinary Portland Cement (OPC), clinker content reaches as high as 94%. Lowering the clinker content and replacing it with cheaper materials, but without reducing quality, will enhance profitability. The lower clinker content cement is known as Portland composite cement (PCC). While Semen Gresik aims to reduce its clinker content to 80% in FY11 from 83% in FY10, it should be noted that reduction of clinker content is only possible for bagged cement. By comparison, bulk OPC cement is commonly used for infrastructure and the construction of high rise buildings. OPC has faster drying characteristics compared to PCC, and property and infrastructure are sensitive to completion time. Hence, OPC is preferred over PCC for large projects. About 80-85% of Semen Gresik’s total sales are bagged cement.

BUY maintained
Semen Gresik is on track with its time line expansion with no investment cost overruns at the moment. Being on track with its expansion plant will make Semen Gresik more attractive as it will resolve the capacity constraints. Moreover, the additional capacity of Semen Gresik will add more than 10% to the total national capacity – a significant amount.

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