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R e g i o n a l M o r n i n g N o t e s Monday, 22 October 2018

COMPANY UPDATE BUY


Semen Indonesia (SMGR IJ) (Upgraded)
Earnings Recovery Underway Amid Margin Improvement. Upgrade To BUY Share Price Rp8,925
We upgrade SMGR to BUY with a new target price of Rp10,300, implying 21.9x 2019F Target Price Rp10,300
PE or in-line with its historical mean. We believe SMGR’s strategy to remain Upside +15.4%
disciplined with its ASP strategy and to increase export sales volume has borne (Previous TP Rp10,600)
fruit, evidenced by a strong margin improvement ytd and a higher utilisation rate vs
peers. We expect a strong 2H18 earnings performance and potential upgrade to COMPANY DESCRIPTION
consensus’ 2019 earnings estimate will serve as catalysts for a valuation re-rating. Semen Indonesia is the largest cement
producer in Indonesia with a 41% market
WHAT’S NEW share. The company also has a presence in
Vietnam through subsidiary Thang Long
 3Q18 sales volume achievement suggests significant improvement in utilisation Cement.
rate. Semen Indonesia (SMGR) recorded a total sales volume of 8.8m tonnes in 3Q18,
surging 43% qoq and 8.4% yoy, mainly driven by a significant jump in export sales STOCK DATA
(+46.2% yoy) while domestic sales grew by only 4.9% yoy. This also translated into GICS sector Materials
significant utilisation rate improvement (at 97%) in 3Q18 as compared to 2Q18’s figure of Bloomberg ticker: SMGR IJ
only 67.8%. The company also raised its ASP by around 3% in 3Q18, mainly to pass on Shares issued (m): 5,931.5
logistics-related cost pressure amid the tightening in over dimension and over load Market cap (Rpb): 52,938.8
(ODOL) regulations by the government. Market cap (US$m): 3,485.8
 Superior profitability over peers amid disciplined pricing strategy and optimal 3-mth avg daily t'over (US$m): 3.1
utilisation rate. Unlike other producers that experienced margin deterioration amid
energy cost pressure in the past two quarters, SMGR recorded consecutive margin Price Performance (%)
52-week high/low Rp11,750/Rp6,725
expansion in the past two quarters. We believe this was mainly due to its strategy to
maintain its ASP since Nov 17, a contrarian move vs peers that lowered ASPs by around 1mth 3mth 6mth 1yr YTD
4-5% in 1H18. Despite losing domestic market share due to this strategy, SMGR was still (0.8) 28.9 (10.8) (15.0) (9.8)
able to maintain an above-industry utilisation rate by significantly increasing export sales Major Shareholders %
in the past three quarters, a move which other producers could not follow and evidenced The government of the Republic of 51.0
its superior profitability over peers. Indonesia
FY18 NAV/Share (Rp) 4,954
 Further margin expansion imminent in 3Q18 on the back of strong operating leverage FY18 Net Debt/Share (Rp) 837
as utilisation rate improved significantly in 3Q18 while cost pressure from a weakening
rupiah and tighter ODOL regulation were largely offset by around a 3% ASP increase in PRICE CHART
Aug-Sep 18. Additionally, SMGR enjoyed higher domestic market share in 3Q18 as peers SEMEN INDONESIA PERSERO TBK
(lcy) (%)
raised ASP by around 4-6%, much higher than SMGR’s ASP hike. It is also interesting to 12000
SEMEN INDONESIA PERSERO TBK/JCI INDEX
110
note that SMGR in 2Q18 for the first time recorded a higher gross margin at 31.1%
11000
100
(+517bp qoq) compared to INTP’s of only 23.4% (-538bp qoq).
10000
90
9000
80
8000

70
7000
KEY FINANCIALS
6000 60
Year to 31 Dec (Rpb) 2016 2017 2018F 2019F 2020F 20
Volume (m)
Net turnover 26,134 27,814 29,173 31,206 33,313 15
10
EBITDA 6,596 5,043 5,291 6,137 7,361 5
Operating profit 4,973 3,126 3,315 4,101 5,263 0
Oct 17 Dec 17 Feb 18 Apr 18 Jun 18 Aug 18 Oct 18
Net profit (rep./act.) 4,522 2,014 2,116 2,796 3,848
Net profit (adj.) 4,522 2,014 2,116 2,796 3,848
EPS (Rp) 762.3 339.5 356.7 471.3 648.8 Source: Bloomberg
PE (x) 11.7 26.3 25.0 18.9 13.8
P/B (x) 1.8 1.8 1.8 1.7 1.6 ANALYST(S)
EV/EBITDA (x) 9.0 11.8 11.2 9.7 8.1 Adrianus Bias Prasuryo
Dividend yield (%) 3.4 3.4 1.6 2.6 4.4
+6221 2993 3990
Net margin (%) 17.3 7.2 7.3 9.0 11.6
Net debt/(cash) to equity (%) 11.8 22.0 16.9 8.9 0.3 adrianusbias@uobkayhian.com
Interest cover (x) 36.7 8.6 8.1 10.8 25.2
ROE (%) 16.3 7.0 7.3 9.2 11.8
Consensus net profit - - 2,035 2,442 2,896
UOBKH/Consensus (x) - - 1.04 1.14 1.33
Source: Semen Indonesia, Bloomberg, UOB Kay Hian

Refer to last page for important disclosures. 101


R e g i o n a l M o r n i n g N o t e s Monday, 22 October 2018

STOCK IMPACT SMGR’S 9M18 CEMENT SALES BREAKDOWN


 Anticipating strong 2H18 earnings delivery. We anticipate strong earnings delivery in
2H18 on the back of a higher utilisation rate as well as a slight ASP increase for SMGR
(mainly to pass through higher logistic costs and a stronger US dollar). Profitability in
2H18 is likely to be higher than 1H18’s realisation, considering that SMGR had started to
raise its ASP in 3Q18.
EARNINGS REVISION/RISK
 We lowered our 2018-19 net profit estimates by 10%, mainly to factor in higher
Source: SMGR
energy and interest costs. We made a slight adjustment to our 2018-19 revenue
forecasts as sales volume achievement in 9M18 is still largely in-line with our expectation. MONTHLY CEMENT SALES
However, we lowered our 2018-19 EBIT and earnings forecasts by 6% and 10%, 30%
Monthly Domestic Sales (Mn tons) Domestic Sales Growth (6-m mov average)
3,000

respectively, mainly to factor in a further increase in coal price, higher interest cost as well 25%
2,600

as a weakening rupiah. 20%


2,200

1,800

EARNINGS ESTIMATES
15%
1,400

-------------- New --------------- -------------- Old -------------- ----------- chg (%) ---------- 10% 1,000

(Rpb) 2018F 2019F 2020F 2018F 2019F 2020F 2018F 2019F 2020F 5%
600

200
Sales volume (k t) 32,600 33,871 34,794 32,600 33,740 34,955 0.0 0.4 (0.5) 0%
(200)
ASP (Rp 'k/t) 824.8 845.3 878.4 831 854 886 (0.7) (1.0) (0.8) -5%
(600)

Revenue (Rpb) 29,173 31,206 33,313 29,385 31,408 33,748 (0.7) (0.6) (1.3) -10% (1,000)

EBIT (Rpb) 3,315 4,101 5,263 3,514 4,361 5,258 (5.7) (6.0) 0.1 Source: SMGR
Net profit (Rpb) 2,116 2,796 3,848 2,375 3,120 3,937 (10.9) (10.4) (2.3)
EBIT margin (%) 11.4 13.1 15.8 17.3 18.1 20.3 UTILISATION RATE TREND COMPARISON
Net margin (%) 7.3 9.0 11.6 13.2 14.1 16.0 110%

Source: UOB Kay Hian


100%

VALUATION/RECOMMENDATION 90%

 Upgrade to BUY with a target price of Rp10,300 based on 21.9x PE on 2019 EPS, 80%

which is in line with its historical mean. SMGR is currently trading at 20.3x forward PE or 70%

at -0.4SD of its historical mean. We believe its stronger earnings power amid improved 60%

profitability and a potential upgrade to consensus’ earnings expectation will act as 50%
3Q17 4Q17 1Q18 2Q18 3Q18
catalysts for the share price to re-rate further from its bottom ytd valuation of 16.3x PE.
SMGR INTP SMCB

FORWARD PE BAND Source: SMGR, INTP, SMCB

36.0 EBITDA MARGIN TREND COMPARISON


33.3
35
32.0
(%)

27.6
30

28.0 25

24.0 21.9 20.2


20

15
20.0
10
16.2
16.0 5
1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 1Q18 2Q18

12.0 10.4 SMGR INTP SMCB

Source: SMGR, INTP, SMCB


8.0
Nov-12 May-13 Nov-13 May-14 Nov-14 May-15 Nov-15 May-16 Nov-16 May-17 Nov-17 May-18

Average ST dev +1 ST dev -1 PER - Roll ST dev +2 ST dev -2


Source: Bloomberg, UOB Kay Hian

Refer to last page for important disclosures. 112


R e g i o n a l M o r n i n g N o t e s Monday, 22 October 2018

PROFIT & LOSS BALANCE SHEET


Year to 31 Dec (Rpb) 2017 2018F 2019F 2020F Year to 31 Dec (Rpb) 2017 2018F 2019F 2020F
Net turnover 27,814 29,173 31,206 33,313 Fixed assets 32,523 32,036 31,513 30,969
EBITDA 5,043 5,291 6,137 7,361 Other LT assets 2,638 2,823 2,731 2,777
Deprec. & amort. 1,917 1,975 2,036 2,098 Cash/ST investment 3,666 3,785 4,605 5,640
EBIT 3,126 3,315 4,101 5,263 Other current assets 10,135 8,950 9,097 9,198
Total other non-operating income 218 176 216 204 Total assets 48,964 47,593 47,946 48,583
Associate contributions (10) 21 16 9 ST debt 1,921 1,866 1,893 1,879
Net interest income/(expense) (588) (651) (568) (292) Other current liabilities 6,883 6,598 6,290 6,173
Pre-tax profit 2,747 2,862 3,765 5,183 LT debt 8,099 6,884 5,507 3,855
Tax (704) (715) (941) (1,296) Other LT liabilities 1,622 1,337 1,479 1,408
Minorities (29) (30) (28) (39) Shareholders' equity 28,915 29,385 31,253 33,744
Net profit 2,014 2,116 2,796 3,848 Minority interest 1,524 1,524 1,524 1,524
Net profit (adj.) 2,014 2,116 2,796 3,848 Total liabilities & equity 48,964 47,593 47,946 48,583

CASH FLOW KEY METRICS


Year to 31 Dec (Rpb) 2017 2018F 2019F 2020F Year to 31 Dec (%) 2017 2018F 2019F 2020F
Operating 1,721 4,992 4,375 5,729 Profitability
Pre-tax profit 2,747 2,862 3,765 5,183 EBITDA margin 18.1 18.1 19.7 22.1
Tax (704) (715) (941) (1,296) Pre-tax margin 9.9 9.8 12.1 15.6
Deprec. & amort. 1,775 1,975 2,036 2,098 Net margin 7.2 7.3 9.0 11.6
Working capital changes (2,069) 901 (456) (217) ROA 4.3 4.4 5.9 8.0
Other operating cashflows (29) (30) (28) (39) ROE 7.0 7.3 9.2 11.8
Investing (3,083) (1,672) (1,420) (1,600)
Capex (growth) (3,452) (1,488) (1,512) (1,554) Growth
Investments 0.0 0.0 0.0 0.0 Turnover 6.4 4.9 7.0 6.8
Proceeds from sale of assets 0.0 0.0 0.0 0.0 EBITDA (23.5) 4.9 16.0 19.9
Others 369 (184) 92 (46) Pre-tax profit (46.0) 4.2 31.6 37.7
Financing 2,181 (3,201) (2,134) (3,094) Net profit (55.5) 5.1 32.1 37.7
Dividend payments (1,809) (1,809) (846) (1,398) Net profit (adj.) (55.5) 5.1 32.1 37.7
Issue of shares 0.0 0.0 0.0 0.0 EPS (55.5) 5.1 32.1 37.7
Proceeds from borrowings 4,330 (1,555) (1,207) (1,737)
Loan repayment 0.0 0.0 0.0 0.0 Leverage
Others/interest paid (341) 163 (81) 41 Debt to total capital 24.8 22.1 18.4 14.0
Net cash inflow (outflow) 818 118 821 1,034 Debt to equity 34.7 29.8 23.7 17.0
Beginning cash & cash equivalent 2,848 3,666 3,785 4,605 Net debt/(cash) to equity 22.0 16.9 8.9 0.3

Changes due to forex impact 0.0 0.0 0.0 0.0 Interest cover (x) 8.6 8.1 10.8 25.2
Ending cash & cash equivalent 3,666 3,785 4,605 5,640

Refer to last page for important disclosures. 123


R e g i o n a l M o r n i n g N o t e s Monday, 22 October 2018

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Refer to last page for important disclosures. 294


R e g i o n a l M o r n i n g N o t e s Monday, 22 October 2018

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Refer to last page for important disclosures. 305

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