Modest 2.1% yoy sales pickup in Dec10 rounded up the cumulative 6.3% yoy growth in 2010. This is in line with our expectation of 6.0% set at the beginning of 2010. Bag vs Bulk data showed no changes (84:16), implying to no progress in infrastructure projects, for two years in row. As inflation threat is seen prominent in 2011, it is highly possible that the central bank may raise interest rates more than expected that could hurt growth in the property sector which has been the biggest source of demand for cement. Therefore, we forecast cement growth of 5.6%, slightly below industry’s projection of 6-8%. Given the risk, we call Underweight on the sector. SMCB is our top sell, considering the price has gone above our fai! r value c alculation.
Kalimantan and Sumatera grew the strongest. Noticeable growth in 2010 was shown in Kalimantan and Sumatera, which grew strongly +17.9% yoy and +9.2% yoy, respectively. This suggests robust development in the two resource-rich islands that we think may further continue in 2011, given the increasing trend of commodity prices.
INTP was the winner due to bigger capacity. Given their bigger spare production capacity, INTP and SMCB have benefited the most from the demand growth in 2010. The two cement producers recorded the strongest growth of 8.6% and 6.1%, respectively, despite ASP was flat along the year. INTP was even able to expand its Java market share to 21.5% (vs. 20.9% FY09), which may increase further in 2011, amid lack of indication of any major capacity expansion by cement producers in 2011. SMGR will only jack up by 1mn ton/yr capacity through de-bottlenecking..
Cement sales expected to grow 5.6% in 2011. 2011 Inflation in our economist view will still be sustained at an average 6.6% (GDP: 6.3% yoy). Yet, as Dec10 inflation has reached 6.9%, we are concerned that the prediction may potentially be surpassed. So, we try to calculate also if inflation comes at 8.0% that could force the central bank to increase interest rate by 100bps, the GDP will grow by only 6.0%. This resulted in our forecast of cement sales growth of 5.6% (vs. ASI: 6-8%) in 2011. As a hint, the fast sales-achiever developers, Bumi Serpong and Summarecon, with their existing projects, set only modest 5-7% growth of its sales target in 2011.
Downgrade to Underweight. Given the risk, we call Underweight to the sector. We chose SMCB as our top sell, as the current share price has gone above its fair value, assuming 2010 PE and EV/EBITDA to Mandiri Universe that we apply to the 2011 valuation. In the mean time, we maintain Neutral for SMGR and INTP. We await new catalyst that may give further upside to their current valuations.
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