Semen Gresik (SMGR IJ, Rp 9,100 BUY) Construction in progress - Danareksa

Construction has started
Semen Gresik has started construction at its plants in Tuban (East Java) and Pangkep (South Sulawesi) to boost its production capacity. In addition, the company will also construct a power plant at the Tonasa plant in Sulawesi, although the Tuban plant will rely on state-owned electricity company, PLN, for its electricity needs. To support the construction, Semen Gresik has drawn down bank loans of Rp500bn as of December 2010, from the total facility of Rp3.5tn. This syndicated loan is provided by Bank Mandiri (as the lead syndicater), Bank Rakyat Indonesia, Bank Jatim and Bank Sulawesi Selatan. The interest cost is benchmarked against the prime lending rate of each bank which hovers at around 10.66%-11.11%, with a grace period of two years. Semen Gresik aims to complete the new production facilities by the end of FY11, with the new production capacity contributing in early FY12.

Moderate results
With its capacity constraints, Semen Gresik posted moderate results with net profits growth of 9.2% yoy to Rp9.3tn in FY10. Revenues were flat and margins were stable since the ASP, volume and energy costs were relatively stable too. The growth in net profits owes to the lower effective tax rate of 22.5% in FY10 compared to 28% in FY09 thanks to falling into the lower tax bracket as stipulated by the latest regulation in addition to receiving incentives from high free float. Note that since Rajawali Group’s divestment, Semen Gresik’s free float has increased to more than 40%, thereby triggering a 5% tax deduction to an effective tax rate of 20% in FY11 onwards.

Earnings revision
We have revised our earnings forecasts to reflect the announcement of the FY10 results. We change our main assumption on the effective tax rate from 25% to 20% due to the tax incentives. We also assume higher coal costs by approximately 20% due to the recent coal price increases. As a consequence, the total COGS per tonne rises by 9.4% yoy in FY11. The net effect is our FY11F net profits are trimmed by 3.5%.

New management
In March 2011, the shareholders of Semen Gresik appointed new management. There are three new directors for the post of Finance, Human Resources and Business Development, while other directors were reelected and hold on to their previous posts. Interestingly, Irwan Suarly, the Marketing Director has been reappointed even though he had represented the Rajawali Group. We think that Irwan Suarly did a good job in improving Semen Gresik’s marketing and distribution, and this explains why he was reappointed regardless of the fact that Rajawali is no longer a major shareholder. Definitely a good sign - especially for state-owned companies which reward people depending upon performance.

BUY maintained
Given its strong fundamentals, we maintain our BUY recommendation on Semen Gresik. And although the near term growth outlook looks limited due to capacity constraints, expected completion of the new facilities in FY12 will allow room for stronger growth. Our new Target Price is set at Rp10,300.