Danareksa Holcim Indonesia

A Good deal
In what looks like a shrewd move, Holcim Indonesia (HI) plans to acquire Holcim Malaysia (HM) Sdn Bhd and its subsidiaries for US$50mn (including the parent company loans of US$13mn). As HM has production capacity of 1.2mn tonnes, the transaction translates into EV/tonne of only US$42. This is very low considering that HI currently trades at US$87 per tonne. We believe the acquisition could easily raise HI’s potential value to Rp840 per share but, for the time being at least, maintain our TP of Rp700. BUY recommendation maintained.

The strategy
HI has two production sites. As both are located in Java, distribution is limited to Java only (to supply cement to other islands would be very costly since cement is a very bulky product which is expensive to transport). Competition is very stiff in Java since other major cement producers (Indocement and Semen Gresik) have a strong presence here too. As such, it makes sense for HI to look beyond the Java market. To achieve this goal, HI would like to acquire HM. Note that HM also belongs to Holderfin (Holcim, the parent company). HM’s plant is located in Johor, meaning it is strategically located for penetration of both the Sumatra and Kalimantan markets. Moreover, the HM plant is also strategically located to serve export markets due to better sea access.

The transaction
The total transaction would be around US$50mn (including the US$13mn loans liable to the parent company, Holderfin). To finance the transaction, HI would take on commercial banking loans and use internal cash. Based on the proforma statement provided by the company, HI’s net gearing would increase to 145% from 114% as of Dec 08. HM’s production capacity is 1.2mn tonnes (this compares to HI’s 7.9mn tonnes). With total EV of US$50mn and production capacity of 1.2mn tonnes, the transaction translates into an acquisition cost of US$42 per tonne. This is very low considering that HI currently trades at US$87 per tonne (using an exchange rate of Rp11,000/US$)

The target
HM has an integrated plant for cement and concrete mix production with annual sales of approximately US$51mn. Its total assets are around US$47mn and it booked a net loss of US$88,000 in FY08. The gross profit margin is only 18% - very low compared to the Indonesian cement producers which have gross margins of nearly 40%! We believe that low selling prices in the region are the main factor behind the poor profitability. As such, supplying the plant’s cement to the more profitable markets in Sumatra and Kalimantan would make perfect logic.

Holcim Indonesia

Significant revenues and earnings growth
Net sales increased 28% to Rp 4.8 trillion in 2008 driven by buoyant domestic market conditions and successful marketing. Holcim Indonesia has gained considerably in independent market surveys on recognition, customer satisfaction and received a number of brand awards. Net profit improved 67% to Rp 282 billion reflecting superior profitability in operations and despite higher translation costs on foreign currency denominated debt, as the US Dollar appreciated strongly against the Rupiah and other regional currencies. National market share remained stable at over 14%.

Financial management
Holcim Indonesia has capitalized on a much improved operating performance, strong cash flow and effective balance sheet management. Early in 2008, shareholders approved the refinancing of existing foreign currency loan facilities, known as Tranche A. This transaction eliminated standing covenants, reduced financing costs and exposure to exchange rate fluctuations - through a conversion of US$60 million debt into a revolving Rupiah loan. Working capital has been tightly controlled, new acquisitions funded and debt repayments met, with a 25% increase in free cash to Rp 853 billion at the close of the year. The debt to equity ratio has improved and interest charges trimmed by 9%. Translation costs have increased in the wake of US Dollar appreciation against all regional currencies, however arrangements to further reduce exposure to US Dollar denominated debt are being currently assessed.

Adding value
Commenting upon the results, Tim Mackay, President Director noted, “This was a balanced performance and sets us on the right path for the challenges ahead. Innovative marketing and brand management helped drive top line sales growth. Behind the scenes, manufacturing and logistics operations made valuable production and efficiency gains. Such teamwork will be even more important to sustain us during the current year as local markets react to the global economic downturn.” He continued, “We made excellent progress in other directions; these included acquiring more production capacity, contributing to the debate on megacity urban planning and sustainable development, pursuing our passions for safety, people development and environmental management and maintaining our community care programmes.”

Behind top line growth, Holcim Indonesia responded to unprecedented coal and oil price increases in 2008 by completing a string of improvement projects. The Company generated energy savings, reduced fossil fuel use and achieved a lower clinker factor, a measure of efficiency, for the fifth successive year. A biomass alternative fuel programme gained formal accreditation under the UNFCCC Clean Development Mechanism in 2008. This is the largest of its kind worldwide under the CDM and the carbon credits generated will enhance future earnings. Biomass co-processed as fuel increased 32% by volume.

Strategic acquisitions
Enhancing reach across its primary market of Java, Holcim Indonesia completed two acquisitions during the year. Ownership of a new cement grinding mill at Ciwandan has shortened supply lines to West Java and South Sumatra providing additional capacity of 600,000 tonnes annually. Investment in a well-established ready-mixed concrete business and aggregates quarry in East Java, adds considerable momentum to progress in this market. Both entities, in combination with the plants at Narogong and Cilacap, represent ample capacity for medium term market development. In the current volatile and uncertain economic conditions, the decision was taken to freeze the Tuban expansion, having completed a full evaluation of the project, including environmental impact. Commented Mr. Mackay, “The project will not come back into consideration until we see the impact of the global financial crisis more clearly, but, in the meantime, our community relations activities in the area will continue.” more...

CIMB Holcim Indonesia

Holcim Indonesia
Result note - Distortion from forex - by Rania Rahmundita
(SMCB IJ / SMCB.JK, NEUTRAL - Upgraded, Rp520 - Tgt. Rp600, Construction and Materials)

Holcim's FY08 net profit was up 67% yoy, 5% above our forecast but well below consensus. However, core net profit more than doubled to some 20% above our forecast due to the tax impact of a fiscal loss in 4Q08 (forex-related). Going forward, we reckon this would remain the main source of error in our earnings estimation. Operationally, costs have started to increase in 4Q08 on higher coal prices. We cut our FY09-10 core EPS forecast by 14-16% on higher cost assumptions, but maintain our target price of Rp600 based on US$100 EV/tonne. We upgrade Holcim to Neutral from Underperform as we believe its recent share-price weakness is adequate. We anticipate catalysts from a stronger Rp which is hard to predict currently.