Our analyst Sarina looked at the latest Indo cement sales numbers. An extremely strong start to the year which makes our numbers look conservative if this rate of growth is sustained. Retain our firm CONVICTION OWT on the sector.
Indocement (INTP IJ) and Holcim (SMCB IJ) are our top picks offering 25% and 30% upside from here respectively. The key here is that both INTP and SMCB still have spare capacity, whereby SMGR is already running at full capacity (about 95% of its 19m tonnes) and the additional capacity will not be ready until the end of 2011.
For 1Q10, Semen Gresik (SMGR IJ) sales rose 12% YoY, compared to INTP’s 21%, and SMCB’s 24%. Clearly, the whole sector is benefitting from strong demand. But the result certainly reflects our view that SMGR with its limited capacity will remain a laggard.
The chart below assumes all three players running at 100% capacity with no exports (as selling to domestic market commands about twice the margin compared to exports – around US$70/tonne vs US$45/tonne)
On that basis, INTP trades at 10.2x earnings and SMCB much cheaper at 7.6x 2011 earnings. We continue to prefer Holcim (SMCB IJ) and Indocement (INTP IJ) for more operational and financial leverage.
SMGR is the most expensive at 11.1x PER. However, one noteworthy comment on SMGR is the improvement of liquidity after the recent large placement. SMGR has now become more accessible to investor.
Key points from the report:
Domestic cement sales in Mar2010 rose by 13% MoM, 27% YoY to 3.38m tonnes.
1Q10 domestic cement sales were 9.7m tonnes, an increase of 17.7% YoY, the highest ever 1Q number and the third highest by quarter.
For 1Q10, Semen Gresik sales rose 12% YoY, Indocement by 21%, and Holcim by 24%.
Based on monthly capacity, INTP has the greatest ability to supply additional demand, followed by SMCB.
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