Good FY08 results
Semen Gresik posted a better-than-expected FY08 net profit. The bottom line was up 42% YoY to Rp2,523b from Rp1,775b in 2007. This was 12% higher than our estimates. Revenues was up 27% YoY on the back of 9.8% YoY increase in domestic sales volume and around 21% price increase. EBITDA grew 35% YoY to Rp3,867b, EBITDA margin went up significantly to 31.7% from 29.7% in 2007. Although fuel cost which accounted for 27.6% of total production cost grew 52% YoY, Semen Gresik managed to keep its total production cost grew by only 17% YoY, thanks to manageable costs such as electricity and raw material cost.
Challenges ahead
As for 2009, cost pressure will come from increase of annual re-pricing of contracted coal price which rises from US$40-45/ton to US$60-70/ton. As coal accounted for 27.6% of total production cost, coal price increase could bring substantial impact for the profitability. However, the good news is electricity and transportation cost which accounts for 28.6% of total production cost will decline as a result of reduction in electricity tariff and fuel price by the government in January 2009. Management also will launch some cost efficiency initiatives such as reducing coal and electricity consumption index, reducing oil consumption, improving plant utilization by increasing number of plant operating days, maximizing use of local raw material sources, and improving synergy among subsidiaries.
Price outlook
Management indicated that cement price increase could be very tough in 2009 given the softening domestic demand. Therefore, Semen Gresik now expects no price increase in 2009. This was different with initial expectations of cement producers that there would still be a room for price increase. We therefore cut our cement price increase assumption from 5% to 0%. After seeing consumption decline in January 2009, to be conservative we also have changed our domestic cement demand growth assumption for 2009 from flat to -3%.
To acquire a regional cement maker
The management recently said to the media that it may buy as much as 40% ownership in a regional cement company in order to maintain growth. The indicated acquisition price was US$80-90 per ton. This is roughly the same with current Semen Gresik and Indocement EV/ton of US$85 and US$93 respectively. However, compared to replacement cost of US$150 per ton, the acquisition price is considered cheap in our view. Given the high capex requirement for new plants development, Semen Gresik may have to partially finance the acquisition using debt. The company currently has a shortlist of six target acquisitions in Southeast Asia with annual capacity range from 1.3m to 13m tons. The management plans to seek shareholder approval for acquisition in May 2009.
Maintain BUY with lower target price
Following our lower adjustment in price and domestic demand assumption we lower our target price to Rp4,100 (from Rp4,400). Our TP is based on DCF valuation and WACC of 15.7%. At current juncture, our new target price still offers 20% upside potential. BUY recommendation maintained.
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