Mandiri Sekuritas Building materials: No surprise this time around

The domestic big 3 cement companies posted in-line 1Q10 financial results, despite slightly lower domestic average selling price (ASP) of around 1%-7% yoy. Nevertheless, we foresee that ASP would slightly increase in the 2H10 to offset the planned 10% increase in electricity tariffs. We also noticed that cost/ton was also lower (around 11-14% yoy) given several efficiencies and economies of scale, as production volume increased. As a result, margins improved. If such conditions continue, cement companies should meet our FY10 target. Nevertheless, their share prices have gone up close to our targets. Limited upside potential forced us to lower our recommendation on the sector to Neutral from Overweight.

In-line 1Q10 results. All cement producers booked in-line 1Q10 results, as the figures represented around 21% of our and consensus’ FY10 targets, amid lower ASP of some 1-7% yoy. Indocement TP (INTP) posted the highest top and bottom line growth (of 16.6% yoy and 56.4% yoy, respectively), while Semen Gresik (SMGR) the lowest (of 0.6% yoy and 17.8% yoy). Meanwhile, Holcim Indonesia (SMCB) was able to book net profit of Rp205bn, reversin! g from Rp 77bn net loss in 1Q09.

INTP booked the lowest cost/ton. Cement producers were able to reduce their cost/ton by 11-14% yoy. Thus margins could be maintained in 1Q10. Among the publicly listed cement producers, SMCB posted the highest cost/ton drop, and INTP the lowest 11.9% yoy. However, INTP’s cost/ton is still the lowest of only around Rp397k, although it was running at around 80% utilization rate.

ASP may be higher in the 2H10. We foresee that ASP would slightly increase in the 2H10 to offset higher electricity tariffs. Note that SMGR and SMCB buy most of their electricity from PLN, while INTP only purchases around 40% of its electricity consumption. It indicates that INTP may be benefited if diesel, gas and coal prices increase does not exceed the electricity tariffs increase of 10%. It if happens, we view that either SMGR or SMCB that may trigger price hike.

Downgrade the sector to Neutral. We maintain our FY10F forecast and target prices for INTP and SMGR, while made some adjustment for SMCB. We lowered our sales volume assumption for SMCB, which resulted in lower DCF-based target price of Rp2,500/share vs. previously Rp2,850/share. Current share prices leaves INTP and SMCB with limited upside potential. We therefore downgraded our call to Neutral from Buy, yet maintaining our Buy recom! mendation for SMGR. Note that INTP is trading at the highest EV/ton of US$356 vs SMGR of US$249 and SMCB of US$254.