CIMB Sector Update – Cement – Diminishing marginal returns

We downgrade the cement sector to Neutral from Overweight. We fine-tune our FY10-12 earnings estimates for cement stocks as we reduce our ASP assumptions while increasing volume assumptions. We also roll over our target prices to end-CY12. The cement sector deserves to trade at premiums to the market, we believe, on account of its superior ROCE, faster earnings growth and high capacity utilisation rates. However, we apply lower earnings multiples for CY12 on the back of a potential easing in margins from an influx of cement capacity. Also, with more options available for exposure to a potential infrastructure boom through Jasa Marga and the soon-to-be listed Krakatau Steel, we expect returns for the cement sector to decline marginally. In the sector, we continue to prefer Indocement given its better positioning to capture future demand at higher prices.