SMCB Reorganized For Growth - Indopremier Securities

Holcim Indonesia has been struggling with significant USD exposure and exchange rate fluctuation for the past 10 years. FY09 and FY10 saw a pivotal point where the management repaid its dollar denominated loan and revalued its balance sheet to remove negative retained earnings balance. Going forward we anticipate to see stable positive income, growth through additional capacity and volume, and dividend payout. In term of fair value, we see decent 14.8% upside margin despite being the lowest upside margin in our cement sector.

Balance sheet reorganization and capacity expansion
Upon revaluation of assets and liabilities in December 2010, SMCB cleaned up its negative retained earnings to allow future dividend payout. However, with planned major capital expenditure of US$ 450 million to build a new 1.7 MT cement plan in East Java, the dividend payout rate will not be excessive if announced.

Less foreign exchange exposure, anticipate stable positive profit
SMCB has significantly reduced its foreign exchange exposure with repayment of US$ 231 million debt last fiscal year and in effect has significantly minimized earnings volatility in FY10 onwards. The total debt-to-equity ratio by the end of FY10 is 0.62 compared to 1.45 in FY08. We anticipate seeing consistent positive net income going forward mirroring consistent positive operating profit post FY05.

Lowest upside potential on valuation
Similar with other producers, we anticipate 8% percentage increase in ASP for FY11 due to cost side pressure before stabilize in 2% level for FY12 and FY13. Volume aspect has the potential to increase up to 7% 3-years CAGR with adequate utilization rate of 65s% on average, but might be restricted with concentrated distribution channel in Java region. Fair value is Rp. 2,125, reflecting 14.8% upside margin.