Semen Gresik (TP Rp11,350)

Skilful navigation through headwinds

What’s New
􀂃 Semen Gresik Group (SGG) reported a 9% y/y increase in 9M11 net profit to Rp2.76t on the back of a 13% y/y rise in sales to Rp11.61t. On a quarterly basis, however, 3Q11 net profit came in at just Rp888b, marking an 11% drop.
􀂃 SGG’s sales volume for 9M11 saw a 10% y/y growth to 13.98m tonnes. Its market share slipped to 40.7% from 43.0% a year ago.

Our View
􀂃 SSG has done a pretty good job navigating through multiple headwinds in the form of rising energy costs, intensifying competition and capacity constraints. It managed to maintain its market share at above the targeted 40% and its 9M11 EBITDA margins remained healthy at 32.6%, despite falling 130bp from a year earlier.
􀂃 Bottomline growth fell short of the consensus of 70%, but was slightly higher than our estimate and met 76% of our full‐year forecast. Sales figure matched our projection at 74% of our FY11 forecast of Rp15.69t. In the light of these results, we believe there is a good chance that SSG may exceed our target forecast, helped by two factors: (1) cement consumption is usually the strongest in 4Q and (2) the company’s maintenance schedule shows less downtime in 4Q11 compared to the previous quarters.
􀂃 What is worrying is the steep q/q margin contraction from 33.1% in 2Q11 to 31.6% in 3Q11. Nevertheless, we do not think margin will come under further pressure in 4Q11 as the coal purchase price for 2H11 was negotiated in 2Q11, meaning SGG would have already paid the higher coal price in 3Q11.

Action & Recommendation
􀂃 We maintain our FY11 earnings forecast and TP of Rp11,350 for Semen Gresik. At our TP, the stock is trading at 15.5x FY12F PER with dividend yield of 3.9% over the next 12 months. Reiterate BUY.

Source: KIM ENG dated 31 October 2011