Macquarie INTP Shining on despite parent’s problems

Event
We reiterate our Outperform rating on Indocement (INTP) and upgrade our target price to Rp7,200 from Rp6,700 on the back of earnings upgrades. INTP is our top pick in the Indonesian cement sector.

Impact
Main beneficiary of 2010 industry recovery. INTP has 20% excess capacity, the highest among the top 3 cement companies. This should enable it to benefit from the expected recovery next year. After a lacklustre 2009, we expect the cement industry to grow 10% and GDP growth to accelerate to 5.5%.

Market leader in Java, where most of the infrastructure spending will be. We believe that Java Island would see the bulk of infrastructure spending post the 2009 parliamentary and presidential elections. With 40% market share in Java, INTP should be the main beneficiary.

Trouble at parent company to benefit minority shareholders regardless of outcome. HeidelbergCement (86% owned by the Merckle Family), which owns 65% of INTP, is in a precarious position given its refinancing needs (€1.8bn maturing debt in 2009 and €6bn in 2010) and the possibility of Merckle Family creditors seizing control of HeidelbergCement. We believe that minority shareholders would benefit as INTP might end up paying a higher dividend or potentially become a takeover target in a bid to help its parent raise cash.

Margins set to expand. We expect margins to expand as costs decline due to lower-priced coal contracts and the rupiah’s appreciation. In addition, the low demand environment allows INTP to use its more efficient plants and shut down high-cost kilns.

Valuations are attractive on a historical basis. INTP is currently trading at around one standard deviation below historical averages on PER and EV/EBITDA. It is trading below historical averages on P/B and EV/tonne.

Earnings and target price revision
We raise our 2009 and 2010 EPS estimates by 15% and 9%, respectively, due to lower costs going forward. Our target price is raised to Rp7,200 (from Rp6,700).

Price catalyst
12-month price target: Rp7,200 based on a DCF methodology.
Catalyst: Government infrastructure spending and potential corporate action by HeidelbergCement.

Action and recommendation
We reiterate our Outperform rating on INTP. It remains our top pick in the Indonesian cement sector. Besides the structural growth story, INTP minority shareholders would also benefit from the problems at HeidelbergCement.