Danareksa Holcim Indonesia

A Good deal
In what looks like a shrewd move, Holcim Indonesia (HI) plans to acquire Holcim Malaysia (HM) Sdn Bhd and its subsidiaries for US$50mn (including the parent company loans of US$13mn). As HM has production capacity of 1.2mn tonnes, the transaction translates into EV/tonne of only US$42. This is very low considering that HI currently trades at US$87 per tonne. We believe the acquisition could easily raise HI’s potential value to Rp840 per share but, for the time being at least, maintain our TP of Rp700. BUY recommendation maintained.

The strategy
HI has two production sites. As both are located in Java, distribution is limited to Java only (to supply cement to other islands would be very costly since cement is a very bulky product which is expensive to transport). Competition is very stiff in Java since other major cement producers (Indocement and Semen Gresik) have a strong presence here too. As such, it makes sense for HI to look beyond the Java market. To achieve this goal, HI would like to acquire HM. Note that HM also belongs to Holderfin (Holcim, the parent company). HM’s plant is located in Johor, meaning it is strategically located for penetration of both the Sumatra and Kalimantan markets. Moreover, the HM plant is also strategically located to serve export markets due to better sea access.

The transaction
The total transaction would be around US$50mn (including the US$13mn loans liable to the parent company, Holderfin). To finance the transaction, HI would take on commercial banking loans and use internal cash. Based on the proforma statement provided by the company, HI’s net gearing would increase to 145% from 114% as of Dec 08. HM’s production capacity is 1.2mn tonnes (this compares to HI’s 7.9mn tonnes). With total EV of US$50mn and production capacity of 1.2mn tonnes, the transaction translates into an acquisition cost of US$42 per tonne. This is very low considering that HI currently trades at US$87 per tonne (using an exchange rate of Rp11,000/US$)

The target
HM has an integrated plant for cement and concrete mix production with annual sales of approximately US$51mn. Its total assets are around US$47mn and it booked a net loss of US$88,000 in FY08. The gross profit margin is only 18% - very low compared to the Indonesian cement producers which have gross margins of nearly 40%! We believe that low selling prices in the region are the main factor behind the poor profitability. As such, supplying the plant’s cement to the more profitable markets in Sumatra and Kalimantan would make perfect logic.