You can contact the author (Teguh Hidayat) by email, teguh.idx@gmail.com. The author live in Jakarta, Indonesia.

See my pictures in Instagram, @teguhidx.

Investment Opportunity in Cement Stocks

On Friday 16th January, for the first time in history, the government of Republic of Indonesia intervened the cement industry by announcing a decrease in the price of cement at a maximum of Rp3,000 (abour US$ 0.25) per sack. And the result is predictable: The stocks of cement on the Stock Exchange collapsed immediately. On that Friday, the stock of Semen Indonesia (SMGR) fell 7.4% from16,200 to 15,000, and dropped further to the level of Rp14,100 per share on the next trading day. Other cement stocks like Semen Baturaja (SMBR), Holcim Indonesia (SMCB), and Indocement (INTP), all three also fell between 4.9 to 12.2% in two trading days after the cement price reduction policy was announced.

In theory, the government policies related to a decrease in the price of cement is only count for SOE cement companies, in this case SMGR and SMBR, which the Government as the majority shareholder of both companies would have full power to raise or lower the selling price of cement produced. However, if SMGR as the cement market leader in Indonesia will lower their product prices, then the other cement companies will also be forced to do the same. So this could explain why the share of private cement companies such as INTP and SMCB were also depressed.

But will this government’s policy actually suppress the performance of cement companies in the future? Well, probably not, and here’s the explanation.

When the Government announced a reduction in the selling price of cement, at the same time the Government also announced a reduction in the price of fuel (gasoline and diesel) and non-subsidized LPG. The price reductions are to adjust the global price of crude oil (and natural gas) that are being low. As we know, currently the government is no longer subsidize the premium fuel so the selling price could change at any time, in this case every two weeks, in line with the change of global oil prices. The same policy is also applied to non-subsidized LPG, in which the selling price will be adjusted to the change of world gas prices. Related to the price of cement, it is not yet clear whether the price will be changed according to the fuel price. However, because the decrease in the selling price of cement was announced in conjunction with the decline in fuel prices, it is most likely that the future price of cement will also be raised and lowered in line with the fuel price.

This means that if later the gasoline prices rise again, then the selling price of cement will also be increased again. In fact, the Government do not need to announce an increase in price (of cement), because the price of cement is definitely going to go up by itself when fuel prices rise again later, because every time the price of fuel goes up, the price of goods including cement will also go up by itself.

Meanwhile, when fuel prices are down (this is not the first time that fuel prices are down), the prices of goods did not go down as well but remain high. If this 'bad habit' is allowed, it will cause high inflation, which in turn disrupt the economy. And maybe that is why the government issued a policy of intervening in the market, in this case starting from the selling price of cement, because just like the fuel industry in Indonesia which is controlled by the government through Pertamina, the cement industry is also controlled by the government through Semen Indonesia (and also Semen Baturaja). When the price of cement is said to be down Rp3,000 per sack, then it is not really down, but only back to the original price before raised some time ago (when the fuel price rose from Rp6,500 to be Rp8,500 per liter). Based on my simple survey to the cement shop near my home (in Jakarta), the price of cement of Tiga Roda at the moment is Rp62,000 (about US$ 5) per sack. This price is higher than a few months ago before the rising of fuel price, which was Rp58,000 per sack. So if the price is lowered Rp3,000, it is actually still rising about Rp1,000 per sack, is not it?

That was a first. Secondly, although not officially announced by the Government, but the price/rate of non-subsidized electricity for industrial customers also go down following the decline in world oil prices (so if later the world oil prices rise, then this electric rates will also rise again). Because the cost of electricity is one of the main components of the costs of cement production, the decrease in the selling price of cement does not necessarily have a significant impact on the net income of the company, because on the other hand the cost of cement production is also down. In fact, if the reduction in production costs is greater than the decline in selling prices of cement, then it would actually benefited SMGR et al, because it means that their profit margins become larger. Remember that the cost of fuel is also one of the major costs of cement companies, in this case the distribution costs, and the cost was also down in line with the decline in the price of fuel itself.

In conclusion, I think it is too early to say that the 'decline' in the selling price of cement will have a negative impact on the profitability of the cement producers. If we look from the other side, when the Government announced a reduction in the selling price of cement, it is good news for construction companies and property developers, who will rush back to the store. So the decline in selling prices of cement, if it actually happens, will be compensated by an increase in sales. It is also in line with the vision of President Jokowi to develop infrastructure in Indonesia, where the vision will never be achieved if the management of Adhi Karya et al pissed off when they met the sales person of SMGR who arbitrarily raising prices on pretext of rising fuel prices, but does not do the otherwise when the fuel prices turned down.

Okay, so are you saying that this is a good time to buy SMGR, INTP, SMBR, or SMCB, because the prices are already low? Before that, let's check the latest valuation of stocks of cement, and the following data is based on the stock price as of January 23, 2015:

Stocks Price (Rp) PER (x) PBV (x) ROE (%)
SMGR 14,475 15.8 3.8 24.2
INTP 23,000 17.1 3.6 21.3
SMCB 1,985 20 1.7 8.5
SMBR 376 12.6 1.4 11.3

Now, if you notice, when the government policy about the decline in the price of cement was announced in January 16th, the shares of SMGR become the most affected, which dropped about 14% in only two trading days. While the strongest stock was SMBR, that only down less than 5% in the same time period. And you know what? From the PBV, as shown in the table above, SMGR is the most expensive cement stock on the Stock Exchange at the moment, while the SMBR is the cheapest. So, a significant difference in the decreases of SMGR and SMBR, although both were the state-owned cement company that directly affected by the decline in cement prices, becomes inexplicable. SMGR, because of its premium valuation, since the beginning has been vulnerable to downside risks if the company exposed to certain negative sentiment. While SMBR, because its valuation was low, the risks of decline are low as well.

So there is nothing wrong with the fundamental of SMGR. In fact, I’m still considering that SMGR is a cement company with the best fundamendal in IDX. But what about the stock price? If you notice, in the last one year the stock of SMGR had always been steady at the level of Rp15,000 to 16,000 per share and rarely went down (it was once down to Rp14,000’s, but went up immediately), because it was driven by investor optimism related to its prospects along with infrastructure development. However, because its valuation already high, it could not rise further and instead can easily go down when there is a certain negative sentiment which automatically 'interrupted' the prospects.

However, because of its predicate as ‘the stock with the best fundamentals', in this case SMGR is more attractive than the other cement stocks.

The problem is, even after the price dropped to its present position, SMGR’ valuation still cannot be said to be discounted. Based on experience, PER of 15.8 times (as a blue chip stock, SMGR’ valuation can also be seen from its PER) can not be said to be low enough for a stock with criteria such as SMGR, namely: 1. The shares are highly liquid, 2. Semen Indonesia is a famous company and also has good reputation, 3. The company’s financial performance is very good and consistent in the long term. Ideally, in the normal market conditions where the Jakarta Composite Index (JCI) is not in bear periode, PER of SMGR is approximately 14 times, so we may say that the price of SMGR is low if the PER is already below 14 times, which means the target price (for you to buy) is up to Rp12,500 per share, of which the price will reflect the PER of 13.6 times.

Then will SMGR will really come down to the 12,500 level? That is, of course, we don’t know. Who knew that in the next two weeks the Government would raised back the price of cement, so SMGR and other stocks will skyrocketted? But what we know is, SMGR valuation at this point is still not low enough. Technically SMGR not seem really rebound because the price is still below the strong support (which now becomes resistance), ie Rp14,625 per share. The increase that occurred in the last two trading days is probably only because being boosted by the JCI that has break the new high. So if JCI down later, then SMGR may continue to slide. And lastly, once again based on experience, if there is a blue chip stock that is down due to a particular cause or negative sentiment, then it would take time, maybe one or two or a few months, to be able to rise again, when the negative sentiment was appeased by itself.

So, when the analysts keep releasing their research and analysis which in essence is to predict the financial performance of SMGR et al in the future, including the calculations of a decreasing net profit margin blah blah blah that is very complicated, but we value investors always keep it simple: If SMGR is actually down further to Rp12,500 per share or below, then we may begin to buy it in installment, while continuing to analyze the development of the company's financial performance from quarter to quarter. If you buy the stock at its current price, then you may still make some gain, but the risk is certainly greater than if you successfully enter in the last 12,500. Your call.

No comments: