Building Material: Gets harder to breathe - Mandiri Sekuritas

We further downgraded TPs of our three cement stocks (Indocement – INTP; Semen Gresik - SMGR, and Holcim - SMCB). The continuing higher energy cost came to less optimistic growth indicated by the three companies, as added that cost may seem to not be entirely passed through amid imminent threat from imported cements. INTP shared that margin will likely be under pressure hence EPS growth is minimal. We think the current share price has reflected to their fair-value. Thus, we put Neutral on the three stocks. Nonetheless, for longer term investment horizon (+3 years), SMGR will be our top picks due to upside potential given by the two new plants which scheduled to be completed by end of 2012, w hile consistent offering the highest ROE. Currently INTP trades at PE11F 15.7x, EV/ton US$298, SMGR PE11F 13.8x, EV/ton US$273 and SMCB PE11F 15.4x, EV/ton US$222.

Accelerating energy cost impacts harder. Pressure from further coal and oil prices acceleration will seem to be all rounded. Not only impact to its direct cost, the hikes have also forced the power producer PLN to raise white flag, approaching the removal of tariff capping that may result in up-to 40% increase in electricity costs paid by cement producers. Although, the move is yet unbar, the producers said to have factored-in the changes. SMGR and SMCB are the most impacted, being the fully dependant. INTP indicates that COGS/ton will likely to increase up to 15-20%, relies now on how much they can increase its ASP in order to offset this.

Minimal growth for 2011. Yet, companies are cautious of threat from imported cements, which could limit the ability to pass the higher costs fully to customers, hence would lower operating margin. INTP hinted its operating margin could be below 35%. We apply +9-10% for the domestic ASP increases, as guided, resulted in minimal EPS growth to the three producers in 2011. INTP is set the highest growth with 5.7% increase, while SMGR and SMCB are 4.2% and 2.3% respectively.

Set Neutral, upside risk on SMGR. We see that INTP is the least affected by the current situation this year, as its bigger spare capacity will enable the company to set another 2-3% sales growth above industry, where we predict to be 5.6% for 2011. Nonetheless, we like SMGR for longer term investment horizon, as we see wider upside potential provided by the completion of the two new plants by end of 2012. In addition, the yet unclear of the removal tariff capping also may turn the company to be the most beneficial this year (EPS growth sensitivity – current: +4.2%; with capping: +10.1%), as coal conversion that company recently conducted, hence become the least impact in terms of coal price surging. In the meantime, SMGR also offers the highest ROE among the three producers (FY11F – SMGR: 29.2%, INTP: 23.0%; SMCB: 13.0%. All in all, at this juncture, we set Neutral on the three stocks.