Healthy Inside - Tough Outside
1Q17 Performance Sited Below Our Expectations
In 1Q17, INTP booked revenue of Rp3.37 trillion YoY, marking 14.06% lower than the Rp3.92 trillion reported in 1Q16. The decline resulted from -4.17% YoY lower sales volume. 1Q17 revenue is still sitting below MNCS’ yearly estimate of Rp15.63 trillion, representing just 21.59%.In the midst of intense competition, INTP has room for cost efficiencies. In 1Q17, the Company's gross profit margin (GPM) fell to 34.47%, from 43.23% in 1Q16, the victim of increased cost of goods sold. Quarterly net profit fell to Rp491.60 billion, down -48.53% YoY and still below MNCS yearly estimate of Rp3.25 trillion, representing just 15.12%.
Key Growth Catalysts in 2017/2018
We believe that a positive profitability trend in 1Q17 will continue throughout the year, supported by: 1) Company strategy that focuses on increasing cost efficiency, with GPM maintained at 40.76% in 2017E and 43.07% in 2018F, maintaining zero leverage with DER of 0.41% in 2017E and 0.38% in 2018F, and launching ‘Rajawali Cement’, a new product; 2) Relief from price depression as the price war is over; 3) Demand starting to pick up, at 5% in 2017E and 8% in 2018F, driven by infrastructure projects and an improving property sector.
OversupplyStill the Main Concern
In our view, INTP will face several challenges in order to deliver higher added value to shareholders, including: 1) Inability to optimize production, constrained by unfavorable market conditions; 2) Tighter competition in the home market (West Java); 3) Limited expansion agenda in the next five (5) years. In our view, INTP’s market share can be potentially stolen by other cement producers, who are continuing to increase production capacity.
Valuation and Recommendation: HOLD with TP Rp17,400
We believe demand for INTP cement will increase moderately and the down trend of ASP will be limited, supported by higher infrastructure. However the main concern of oversupply is still intact. Thus we initiate a HOLD recommendation with target price (TP) of Rp17,400 per share for next 12 months, indicating -0.71% potential downside from current share price at Rp17,525 (as of July 18th 2017). Our valuation implies 19.70x/17.49x of PE17E/PE18F.
