Cautiously Optimistic Outlook
Expectations for Infrastructure and Property Development as well as Moratorium on New Factory Construction...
• Entering the 2H22, the infrastructure projects and residential commercial are expected to support the absorption of domestic demand. IKN development and several projects in Sumatera and Eastern Indonesia are planned to start in 2H22E. Furthermore, developers are also taking advantage of the increasing demand in line with the commodity boom by building new clusters in Jabodetabek areas with soon-to-be prepared facilities (MRT phase III). We assess this activity will absorb ready-to-use products, where currently cement products experienced an oversupply of ~40mn tons in FY21. In addition, the potential for a more stringent moratorium on new factory construction would positively impact the cement sector.
• The domestic cement market regained +7.5% YoY growth in May-22 with stronger growth in the bulk market of +33.3% YoY vs bag market of +1.4% YoY. Outside Java experienced a flattish growth of +0.2% YoY, while the Java region grew by +14.7% YoY. A strong recovery has also been seen in Eastern and Western Java regions for both bag (+23.5%/22.2% YoY respectively) and bulk market (+48.9%/+30% YoY respectively), due to low-based volume last year where the Eid Al-Fitr holiday fell in the middle of the month vs this year in early May.
...Despite, Coal Prices and Global Economic Recession Risks Remain Overshadowed
Despite having wave IV presence, the risk from Covid-19 seems relatively moderate yet manageable. We assess several looming risks, such as: 1) an increase in electricity tariffs for households starting in July-22; 2) the plan to implement a carbon tax on coal-fired power plants becomes the biggest pressure on the cement industry. We assess that this policy may be followed for adjusting industrial electricity tariffs. The persistently high price of coal combined with limited volume resulted in an increase in ASP for bag products in Java and an evaluation of the pricing situation in various regions in Mar-22. The looming high inflation impacts the possibility of an increase in the benchmark interest rate, which will suppress property demand, thus postponing several plans. However, the biggest risk we currently assess is a global recession, which will interfere with some future plans.
What’s the Strategy?
Hitherto, INTP IJ and SMGR IJ are still obliged to increase their ASP by ~3%-5% and might have another increase if there is no improvement from the soaring coal price. Cement players also hope that the latest EBT Bill requires companies to fill at least 30% of domestic coal demands with the highest price of USD70/ton from a coal reference of 6,322 kcal/kg, which might bring a positive effect on getting cheaper production costs.
NEUTRAL Recommendation for the Cement Sector
We change the recommendation from OVERWEIGHT to NEUTRAL outlook for the cement sector in FY22E-FY23F. The valuation is based on SMGR IJ and INTP IJ at the level -1STD PE band (average 3 years). We believe in raising demand on property and higher infrastructure budget on FY22F to boost domestic consumption. Our top picks are SMGR (BUY; TP: IDR12,500) and INTP (BUY; TP: IDR14,000). Risk to our call: 1) Higher coal price; 2) ODOL and carbon tax policy.
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