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Selasa, 10 Mei 2011

Switch from cement (big cap) to property/construction stocks - JP Morgan

Liliana Bambang (analyst) has downgraded rating on SMGR from O/W to U/W, saying there is 6% downside risk to FY11 consensus. Its sales volume is only up 1% yoy in 1Q11, while at best selling price may be hiked by 5% in FY11. So the Street’s 14% revenue growth could be looking optimistic, where Liliana is forecasting 9%. Big proportion of national growth in cement consumption is happening in Jakarta and West Java, where SMGR’s competitors Holcim (SMCB) and Indocement (INTP) have stronger preference.
https://mm.jpmorgan.com/PubServlet?action=open&doc=GPS-591751-0.pdf

My take – I would agree with the call to reduce SMGR. I would reduce INTP at the same time, rather than switching from SMGR to INTP. With Liliana’s lower-than-consensus forecast on SMGR, the relative pricing between the two stocks seem fair (with both seemingly expensive), at 12.7x FY12 for SMGR vs. 14.6x for INTP. By year 2012, both SMGR and INTP should have spare capacity (with SMGR’s new cement plant coming on), so arguably INTP should no longer trade at big premium to SMGR.

Personally, I would advocate investors to switch into property and construction stocks. (1) property price gains are both accelerating and broadening, (2) cement price is capped by competition, cartel investigation, and new capacity in 2012-13, (3) cement purchases account for 15-20% of COGS for property and construction companies, (4) APLN, ASRI, and PTPP trade on 10-11x P/E for FY11 vs. SMGR and INTP at 14.7x and 17.0x, (5) my proposed property and construction basket trade around US$10mn/day vs. SMGR and INTP that together trade around US$15mn/day – with scope to be double bagger, if Indonesia’s new land acquisition law and investment grade come to fruitition.

Based on a series of interview with senior government officials (including FinMin Agus Marto) and senior management of construction, cement, and infrastructure companies, decision makers are cautiously optimistic that the new land acquisition bill can happen by September 2011.
Posted by Saham Pilihan at 14.34

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