SMGR:Sales pressure to start taking effect - Mandiri

Despite slight 0.3% decline in revenue, SMGR managed to post in-line with our and consensus FY10 net profit of Rp3.6tn or +9.2% yoy. Tax rate benefit following extra public float in the market helped the bottom line figure significantly, added with operating margin improvement on the back of cost efficiency. We applied similar tax rate in our forecast that resulted in higher EPS growth, especially FY11F to +8.2% from earlier +4.2%. This boost our DCF fair value calculation to Rp9,100/share, but we keep our Neutral call on the counter. However, SMGR is still our favorite for the long term, given upside risk from the capacity expansion13.5x and EV/ton US$253.

In-line results, thanks to tax benefit. SMGR’s in-line with our and consensus FY10 net profit was mainly supported by better-than-expected tax rate benefit of 22% vs. we earlier estimated of 25%. There was no improvement in the top-line level as a result of 1.4% decline in domestic ASP, despite slight 2.9% pickup in the 2010 domestic sales volume. Operating margin improved to 31.3% (vs. FY09 30.2%) driven from cost efficiency along the year. However, we expect margin to shrink to 29.8% in 2011 due to pressure from energy costs.

SMGR sales growth still minimal... The company’s 2M11 sales grew by 1.7% vs. industry’s 7.1%. This is disappointing, given its aim to reach at least in-line with industry growth (+5-6%) this year. In the past 5 years, except in 2009, SMGR at least booked 3% sales growth during the first two months of the year. This may become an indication for another slow sales year for the company.

…and inflationary pressures to start taking effect. In addition, inflationary pressures seemed to have started taking effect on the overall industry growth. We think that 7.1% domestic growth to date has been much supported by the progress of infrastructure works, evidenced through shifted bag vs bulk data sales to 82:18 vs. FY09 of 84:16, while Jakarta (+27%) and West Java (+22%) have been the most progressive in terms of area sales growth. Knowing INTP and SMCB are the leaders in these markets, thus a modest +3.5% sales forecast we think does make sense applied to SMGR this year.

Maintain neutral, yet still the long-term favorite. However, SMGR is still our favorite for long term given upside potential from the capacity expansion and further efforts to improve its cost efficiency. The uncertainty over the removal of the capping for electricity charges by the state-owned electricity company PLN may also add potential re-rating, given SMGR is fully dependent on PLN. Nonetheless, at this juncture, we maintain the Neutral call on the stock.