Lukewarm Outlook
4M17 Cement Consumption Driven by Bulk Growth
Up until 4M17, national cement consumption grew 3.40% (YoY), with the highest figures emerging from Java, where total demand increased by 7.30% (YoY), followed by Nusa Tenggara with 5.6% (YoY), and Sumatra at 0.5%. Strong demand for bulk cement saw 6.3% growth (YoY), supported by profuse development of ongoing Government infrastructure projects. Meanwhile, bagged cement only rose by 2.0% (YoY), an effect of the slowdown in property demand lingering over the last 2 years.
Prices Hammered by Oversupply
In recent years, cement prices weakened, along with oversupply in the cement industry and a regrettable price war among 15 cement producers. However, the price war has currently calmed somewhat because: 1) The decline in cement price has burned out in last two (2) years, hitting its lowest level in the last 8 years; 2) New cement players have already gained a slice of market share, so they felt confident enough to gradually raise prices to secure their margins; 3) Limited room for most cement players to sacrifice their own margins any longer, as it will crater Company cash flow and profits. In the end, a price war will potentially backfire, crippling expansion of the Company; 4) Demand is predicted to continue increasing, albeit slowly. Against this, oversupply is predicted to persist until 2023, a victim of slow growth in demand.
Recommendation: Neutral
We are staying NEUTRAL on this sector on account of the oversupply issue in FY17E/FY18F. Our top picks for the Indonesian cement sector are SMGR (HOLD; PT: Rp 9,200) and INTP (HOLD; PT: Rp 20,000). Currently SMGR is traded at PE17E/18F of 9.27x - 8.83x and EV to EBITDA17E/18F of 7.43x - 6.94x, while INTP is traded at PE17E/18F of 16.15x - 17.61x and EV to EBITDA17E/18F of 11.75x - 11.40x. We believe that SMGR and INTP will be the first to benefit from the anticipated turnaround story of the sector.
