Citigroup SMGR Alert: Weaker Contribution from Outside Java TP 4950

Semen Gresik Group reported its Feb10 sales volume at 1.3m tons, or 9% lower MoM and flat growth YoY. Domestic volume accounts for most of the total, and was 9% lower MoM or 6% higher YoY. YTD to February 2010, Semen Gresik Group’s total volume is at 2.8m tons, or 4% higher YoY. Domestic volume grew by 9% YoY, whilst exports are now only 18K tons, or 85% lower YoY. Based on data from the Indonesia Cement Association,
Semen Gresik Group’s domestic market share declined to 43.4%, from 45.3% in 2M09. This was due to weaker contributions from the subsidiaries, Semen Padang and Semen Tonasa. The company is estimated to be running at an 87% utilization rate, based on 19.1m tpa capacity.

Semen Gresik (parent company) is estimated to be running at full utilization on 8.8m tpa capacity, with 28% higher volume growth YoY to 1.6m tons. This accounts for 56% of the group’s volume. Its domestic market share rose to 24.5% in 2M10, from 21.7% in 2M09, with stronger demand in Java.

Meanwhile subsidiaries Semen Padang and Semen Tonasa recorded lower volumes. Semen Padang posted 16% lower volume YoY to 773K tons in 2M10. Its domestic volume declined by 3% YoY to 771K tons, whilst exports plummeted by 98% YoY. Its domestic market share declined to 12.1% in 2M10, from 14.2% in 2M09. Semen Padang accounts for 28% of the group’s volume. The company is running at a 76% utilization rate on 6.1m tpa capacity.

Semen Tonasa recorded 16% lower volume YoY to 443K tons. It accounts for 16% of the group’s total volume. Its domestic volume plummeted 19% YoY to 427K tons. Its domestic market share fell to 6.7% in 2M10 from 9.4% in 2M09. The company is running at a 63% utilization rate on 4.2m tpa capacity.

Valuation
Our target price of Rp4,950/share is based on 6.3x EV/EBITDA 2010E, derived from
the company's historical average forward EV/EBITDA since July 2006. We use July
2006 as the benchmark as this is the period that Rajawali Group acquired a 25%
stake of the company. Since then, the company has turned around and is managed
more effectively. Its operations have improved with a 38% EBIT CAGR 2006-2008,
and capacity has increased 6.5% to 18m tpa at the end of 2008. Most importantly,
the subsidiaries, namely Semen Padang and Semen Tonasa, have integrated
operations. By having operations in three different locations around the nation, it
has emerged as a strong cement producer. For a sanity check, our target price
implies a 2010E P/E of 8.5x, below the historical average since July 2006 of 10.2x.
Our target price equates to an EV/capacity of US$130/ton, below US$150/ton
replacement cost.