Indocement recorded superior performance and resulted in higher profitability in 1Q10 which was triggered by strong domestic demand and lower production cost per ton. All in all, the 1Q10 figures were inline with our expectation, in which the company revenue and net profit has reached 20.3% and 23.2%, respectively, compared to our FY10 forecast. We maintain our FY10 and beyond forecasts with this year’s estimate of earnings growth of 23.3% and 18.7% next year. Indocement is our top pick in cement sector since the company has ample capacity and supported by a healthy balance sheet. Hence, we reiterate our BUY recommendation with fair value at Rp 19,100 per share which offers 18% upside potential.
Strong demand in 1Q10 since FY10 bullish cement sector
Bullish on cement sector (mainly for domestic demand) for the year 2010 triggered Indocement to have operated its several inefficient kilns last year which was aimed to increase cement volume and recapture its market share losses. The moves proved well as we noted that the company posted a 21.2% YoY domestic volume escalation in 1Q10 which accounted 2.99 million tones, after posted a significant domestic decline (-15.9% YoY) on the same period last year due to weakened purchasing power amidst global financial crisis.
Superior performance and higher profitability
Despite of lower ASP (-3.9% YoY) in 1Q10, Indocement was still able to recorded superior financial performance and resulted in higher profitability which was backed by its strong domestic demand and the company’s experience in cost efficiency program. The gross margin has risen sharply by 575.9 bps in 1Q10 to 51.9% (vs 46.1% in 1Q09) thanks to its lower production cost, while the net margin has elevated by 786 bps to 30.9% on the back of a significant interest expense decline, higher interest income and also continuation Rupiah-US$ appreciation in 1Q10 which resulted Rp 15 billion in forex gain.
Maintain BUY – fair value Rp 19,100
The stock price has experienced rapid surge and recorded its all-time high at Rp 16,550. Nonetheless, we view Indocement’s share is eligible to conduct premium valuation ,given its ample capacity, superiority in lowered production cost as well as supported by healthy balance sheet. At our fair value, Indocement share price is valued at 20.76 times FY10 PER and 17.49 times FY11 PER. We reiterate BUY recommendation with a fair value at Rp 19,100 per share which offers 18% upside potential.
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