Indocement (INTP.JK) -TP Rp19,500

Indocement (INTP.JK)

Alert: 4Q11 Results: Robust Volume Mitigates Tepid Price Hikes
n Substantial sequential growth — Indocement’s robust volume in 4Q11 boosted the company’s earnings growth in the quarter despite margin pressures. Net earnings grew 20% Y-Y (+17.4% Q-Q) in 4Q11 to Rp1.0t. This brings 2011 net earnings to Rp3.6t (+11.5% Y-Y) – in line with consensus estimate and 4% below Citi’s.

n Robust revenue but less exciting earnings — Robust domestic cement demand in 4Q11 underpinned Indocement’s strong top-line growth. Revenue was up 35.6% (+19.1% Q-Q) in 4Q11 to Rp4.1t. The robust growth was on the back of nearly 30% domestic volume growth (+18% Q-Q). However, given the tepid price hikes of just 1- 2% in 4Q11, Indocement’s gross margin was further eroded to 44.5% in 4Q11 from
45.9% in 3Q11 (4Q10: 47.7%).

n Better milieu for price hikes in 2012E — We expect higher domestic cement price hike of 6% in 2012E vs. just c.2-3% in 2011. Aside from Holcim Indonesia’s limited spare capacity, we believe the government’s planned fuel price hike would provide cement producers strong justification for more substantial price increases. In the past, sizable price hikes were preceded by the government’s huge fuel price increases as cement producers exercised price discipline to protect their margins. Our channel checks suggest that retail cement prices have risen by c. 2% in 1Q12.

n Recommendation and catalysts — Indocement trades at 14.2x P/E 2012E – 0.2 std above its 5-year mean P/E of 13.6x. The stock has outperformed the market by 5% YTD on robust cement volume. Investors would assign higher valuations for cement stocks, in our view, as concerns over risks of further margin erosion are alleviated.

Source: CITI dated 26 March 2012