v Main beneficiary of demand upturn in Java — Logging tepid growth of just 2.3% CAGR in 2004-09, Java’s cement demand has well lagged that of outer island’s 8.7%. Java accounted for 62.1% of national demand in 2004 but plunged to 54.9% in 2009.However, we believe that the ongoing mortgage boom on the back of record-low mortgage rates and banks’ concerted efforts to boost their mortgage portfolio would underpin a robust upturn in Java’s cement demand in the next few years.
v Raising estimates — Thanks to its spare capacity and strong brand equity in Java and improving market share in fast growing Kalimantan, we expect Indocement to increase its national market share to 31-32% in 2010-12E from 30.4% in 2009. Hence, we have raised our domestic sales volume estimates for Indocement by 3.8% and 5.6% YoY, respectively, for 2010-11E to 13.0m and 14.2m tons. However, we maintain our domestic selling price hikes of 6% pa for 2010-12E. This leads to us raise our 2010-11E net earnings estimates by 11.4% and 10.0%, respectively.
v TP upgraded to Rp18,400; Buy (1M) maintained — We raise our TP to Rp18,400 from Rp13,205 on higher earnings estimates and higher valuation multiple. We now base our TP on EV/EBITDA 2011E of 10.1x (1 std deviation above mean) instead of just assigning the mean multiple previously. We believe the higher valuation is warranted given Indocement’s much lower risk profile (having slashed debts aggressively) and improving profitability. We continue to like Indocement with its strong operational growth on lower costs and opex.
v Transferring Coverage — We hereby transfer coverage responsibility for PT Indocement shares to Kim Kwie Sjamsudin from Ella Nusantoro, who is leaving CIRA.
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