Macquarie SMCB Focused on servicing parent

Event
We reiterate our Outperform on Holcim Indonesia and upgrade our target price to Rp760 from Rp700 due to earnings upgrades.

Impact
Beneficiary of 2010 industry recovery. SMCB has 15% excess capacity, allowing it to benefit from the predicted recovery next year. Its ready-mix and bulk business, which accounts for 36% of revenue, should benefit from a recovery in large-scale property development projects. After a lacklustre 2009, we expect the cement industry to grow 10% and GDP growth to accelerate to 5.5%.

Highly concentrated in Java, main growth area in 2010–11. We believe that Java Island would see the bulk of infrastructure spending post the 2009 parliamentary and presidential elections. With 80% of its sales in Java, SMCB should benefit.

Highly geared, but operationally solid. Although SMCB is highly geared, 94% of its debt is to its parent company. We believe that its focus will be on generating cash to service its US$286m parent company debt, where instalments are set to begin in 2009. As it is still in a deficit, it will not be able to pay out dividends until it turns into a surplus, most likely in 2014. Benign competition will also likely lead to firm prices, despite declining costs as a result of rupiah appreciation and lower coal contracts in 2010.

Helping out parent company. We believe that the company’s move to shift back cash to its parent is an indication of its solid operations and FCF generation. The company announced that it was in the process of acquiring 100% of Holcim Sdn Bhd in Malaysia for US$50m from its parent. In addition, it prepaid US$45m of its US$331m parent company loan in February.

Valuations are attractive on a historical basis. SMCB is currently trading at round one standard deviation to its historical averages on EV/EBITDA and EV/tonne. On PER and P/BV, it is trading below historical averages. As such, its valuation is attractive, in our view.

Earnings and target price revision
We revise up our 2009 and 2010 EPS estimates by 43% and 1%, respectively. Our new target price is Rp760 (previously Rp700)

Price catalyst
12-month price target: Rp760 based on a DCF methodology.
Catalyst: Government infrastructure spending, prepayment of parent loan.

Action and recommendation
We maintain our Outperform call on SMCB due to attractive valuations. However, Indocement remains our top pick in the Indonesian cement sector due to its spare capacity and strong balance sheet.