Margin Concerns
PSN of Road Sector Stimulates Bulk Consumption
Cement producers booked positive revenue growth, with increasing sales volume and higher ASP in 9M18. This, along with domestic cement sales volume in 10M18,grew by 5.14% YoY to 56.97 million tons, driven mainly by growth of 12.92% YoY for bulk cement. We estimate domestic cement sales to grow by 3.69% YoY to 68.92 million tons in FY18E, while sales of bulk cement will continue torise, supported by plans to complete government PSN projects. KPPIP stated that there are a total of 18 PSNs of toll road sector that will commence operation by 2019, with a total length of up to 921 km. Therefore, we forecast bulk cement sales to grow by 10.19% YoY to 17.57 million tons in FY18E. We asses this as potentially boosting revenue of cement producers in 2H18E/1H19F.
SMGR and INTP Have More Benefit from Implementation of Free Float Adjustment
Indonesia Stock Exchange (BEI) plans to set up new weighting from market capitalization to ‘free float adjustment’ in February 2019. We assess this possibly delivers positive effect to SMGR and INTP stock price movements, whereas of November 9, 2018 the weight of SMGR and INTP on the overall market cap of LQ45 Index was 1.34% and 1.50%. Those weight potentially increasing to 1.85% (SMGR) and 2.07% (INTP), after the implementation of Free Float Adjustment.
Efficiency is the Keyamid High Coal Price
In the middle of oversupply in the Indonesia cement industry, cement manufactures are competing for market share to improve revenue. Meanwhile, high coal pricesexert pressure on profits of manufacturers. They must therefore strive to improve cost efficiency, not only in production costs but also operational expenses, to maintain their financial performance.
Neutral Recommendations with Top Pick : SMGR
Cement demand still has the potential to rise in FY18E/FY19F, driven by toll road construction and BI's LTV easing. However, acute oversupply, coupled with higher coal prices, will hamper the performance of cement companies. Therefore, we recommend NEUTRAL for the cement sector, with SMGR (HOLD; TP : IDR11,000) as our top picks because SMGR has better cost efficiency than other cement producers.
