Danareksa Semen Gresik (SMGR) Replacement Cost Attracts

Replacement Cost Attracts

Improving cost efficiency
As FY09 will be a more challenging year, Semen Gresik will make greater efforts to improve production efficiency. To achieve this goal, Semen Gresik will improve energy usage; use more local content materials rather than pricy imports (to mitigate the impact of the weaker rupiah); and reduce the number of plant shutdowns.

Progress is being made on the expansion front
Semen Gresik shall boost production capacity by 2 x 2.5mn tonnes and build a new 2 x 35MW coal fired power generator. The procurement and construction stages are the largest elements of the project, representing about 60-70% of the total process. Yet as the expansion is still in its early stages, it will be some time until the project is completed.

Excellent FY08 results
FY08 was an excellent year for cement producers. Domestic demand was very strong. This gave room to cement producers to raise selling prices on the domestic market. In regard to the sales mix, it was skewed to the more lucrative domestic market. This gave cement producers higher average selling prices. And despite the concerns over higher production costs (stemming from higher energy prices), they were offset by the higher selling prices as cement producers passed on the higher costs to their customers. In such a favorable business climate, Semen Gresik showed better performance and improved its margins.

Reiterate BUY
We maintain our BUY recommendation on the counter given its low EV/tonne valuation. Moreover, the weak rupiah means that the counter is even more attractive since most of the investment costs are foreign currency linked. At the current share price, the EV/tonne of Semen Gresik is only US$94, or far below the replacement cost of around US$150. Our target price of Rp4,100 reflects EV/tonne of US$115 (with a YE09 exchange rate of Rp10,684/USD), or still considerably below the replacement cost.