Nick Cashmore is downgrading SMGR to an UPF. While cement remains one of our conviction picks, and SMGR has delivered 30% earnings for the last seven years, sustaining this strong performance will be a challenge, in our view. 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.
The stock is trading at a reasonable 12.5x earnings but adjusting for space capacity, SMGR looks less attractive relative to peers. 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 this basis, INTP trades at 9.9x earning and SMCB much cheaper at 7.0x 2011 earnings. We continue to prefer Holcim (SMCB IJ) and Indocement (INTP IJ) for more operational and financial leverage. One noteworthy comment on SMGR is the improvement of liquidity after the recent large placement. Gresik has now become more accessible to investor.
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