Nick revisits the cement sector. The sales data for August were weak, falling by 3.3% MoM to 3.6m tonnes and if export sales are included sales were flat MoM at 3.9m tonnes. The weakness is attributed to seasonally slower sales during Ramadan, poor weather conditions and the deferral of state-financed infrastructure project.
We are not overly concerned on the one month data, noting good 9.5% YTD growth for the sector. In fact, Indonesian cement demand has averaged 1.5x GDP growth for the past three decades and in the last bull cycle (1985-1995) cement demand growth averaged 10% p.a.
And in spite of the strong growth, Indonesia still ranks third from the bottom on per capita cement consumption and to even reach Thai levels, our demand has to triple from here.
It is also worth noting that 80% of cement demand come from bagged cement which means housing demand. Here too, the numbers have remained strong. Marketing sales of major property developers have soared, almost doubling in 1H2010 YoY (see chart below). And with competition for mortgage loans intensifying amongst the banks, we think that any mortgage rates increase will lag the benchmark interest rate substantially.
Both Holcim (SMCB IJ) and Indocement (INTP IJ) remain our conviction BUY offering operational leverage into this structurally strong cement market. Valuations on first glance look a bit stretched but if capacity is normalized (assuming 100% capacity in 2011) INTP trades at 12.5x earnings and SMCB at 7.7x with close to 30% ROE.
Key points from the report:
Asean is in a building frenzy, with compelling demographics, rapid income growth, record low interest rate, and sound banking systems. A wall of money is about to hit the sector. Execution is Indonesia's weak spot, particularly for public sector projects.
The strategic case to be OWT cement. Indonesian cement demand has grown 9.5% YTD. At this rate, consumption will double within seven years to 80m tonnes. Cement demand has averaged 1.5x GDP growth for the past three decades; in the last bull cycle (1985-1995), the demand has grown by an average 10% pa. Domestic per capita consumption of cement is still the third lowest in Asia. To reach even Thai's level, demand must triple from here.
Sweet spot for Indonesian cement producers. Earnings, margins and operational performance will continue to improve. Indocement (INTP IJ) and Holcim (SMCB IJ) offer the best operational leverage to volume growth. Normalising earnings based on full capacity on 2011 forecasts, INTP trades at 12.5x, and Holcim at 7.7x.
Compared to Indian, Malaysias and Taiwanese peers, Indonesian cement plays look more expensive on P/E ratio, however offering more growth and higher ROE.
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