Kim Eng SMGR Falling short of expectations

What’s New
􀂃 Semen Gresik Group’s (SGG) 1H10 results fell short of our expectations. Sales slid by 1.6% y/y to Rp6.66t on falling exports (down 78.7% y/y) and sluggish domestic sales volume growth (+4.0% y/y). EBITDA inched up 6.4% y/y to Rp2.26t, which represented just 39% of our full‐year estimate.

􀂃 SGG also saw national market share dropping to 42.7% by end‐June 2010 from 45.7% a year ago – an alarming rate of decline in our view.

Our View
􀂃 The shortfall in 1H10 sales can be traced to Semen Padang (SP) and Semen Tonasa (ST). SP suffered tepid volume growth (+1.7% y/y) in the wake of stiff competition, while kiln shutdown at ST for more than a month due to a major overhaul in 1Q10 dented sales (‐4.0% y/y). However, ST’s sales volume rebounded by 18% q/q to 891,000 tons in 2Q10. Though capacity constraint could hinder growth in the next two
years, we believe SGG will recover lost market share in the long term as its exposure to growth markets outside Java is second to none.

􀂃 EBITDA margin expanded to 33.9% in 1H10 from 31.4% a year ago. On a quarterly basis, however, it is clearly hitting a plateau, sliding to 33.7% in 2Q10 from 34.2% in 1Q10 and 34.4% in 4Q09. We believe near‐term margin improvement is unlikely as SGG’s ability to raise price is curbed by the reluctance of its peers to follow suit as their focus is to gain market share.

Action & Recommendation
􀂃 We cut our 2010‐2011 net profit forecasts by 11% and 12% to Rp3.74t and Rp3.89t, respectively, to reflect our far more bearish stance on SGG’s short‐term performance. We also roll forward our valuation base to 2011. Our target price is shaved to Rp9,950 from Rp10,300, but our long‐term bullish assumptions are intact. Reiterate BUY.