Ciptadana SMGR Macro economic recovery will support robust cement consumption next year

Coverage initiation of PT Semen Gresik Tbk (SMGR) with Buy recommendation at target price of IDR 8,500 representing 21% upside potential from Oct 20th 2009 price IDR 7,000 on the back of better expected macro economic recovery and implementation of government capital expenditure for infrastructure projects. Government priority to push infrastructure project as well as higher residential and commercial project development will sustain demand for domestic cement consumption. As cement domestic consumption is dominated by private sectors; we used property and household spending as the proxy to support robust outlook for cement industry next year. SMGR with installed capacity around 39% of total national but yet control the 49% revenue shares on 1H09 is the market leader running at almost full capacity. Domestic consumption predicted to remain flat or growing slightly in 2009, however as anticipation of demand growth in 2010 the company plans to increase its installed capacity to maximum 19.1 million tons in 2010 and 19.7 million tons in 2011 from existing capacity of 18 million tons. The new company’s plant in Sulawesi is expected to be completed in 2011, which should support company’s expansion plan to East Indonesia.



· Better economic growth will be the driver for cement industry as lower interest rate and manageable inflation will push private consumption which is the major buyer in cement industry

· Government plan on infrastructure spending to support targeted economic growth will create higher cement demand

· Lower interest rate will induce Property Company to continue their development projects.

· SMGR control 39% of total installed capacity yet control 49% revenue shares

· Risks are the unexpected turn around of predicted economic condition and the delay in company’s plan to increase installed capacity.



We are using Discounted Cash Flow valuation with 16% WACC and 4% terminal growth. The Terminal Growth is derived from the average of 10 years Indonesia GDP growth. Domestic sales growth and selling price are the key drivers for revenue growth for our valuation. We used moderate assumption of 7% domestic consumption growth next year, with concern of the company limitation of additional installed capacity until 2010. Our target price implied P/E010 15.0x and EV/EBITDA010 9.3x.