You can contact the author (Teguh Hidayat) by email, The author live in Jakarta, Indonesia.

See my activities in Instagram, @teguhidx.

Semen Gresik and Indocement: Outlook

On November 19, 2012, Semen Gresik (SMGR) announced a significant corporate action, namely the acquisition of Thang Long Cement, a Vietnamese cement company. Shortly thereafter, the stock of SMGR rose because of the news, until almost touched a new high of Rp17,000 per share, before then dropped to its current position of 15,850. If we talk about the stock, then nothing could be discussed because it's pretty obvious the stock already overvalue, or at least cannot be said to be undervalue. But, let's try to learn the prospect of the company in the future, especially after the above corporate action.

SMGR, as you know, is the biggest cement company in Indonesia with a market share of approximately 40% in 2011. Although named 'Semen Gresik', but SMGR is also the parent of Semen Padang and Semen Tonasa, so the company's distribution network is covering almost all region in Indonesia, from East Java (Gresik), West Sumatra (Padang), until South Sulawesi (Tonasa). Historical financial performance of the company is fairly good and consistent, with the ROE that is always above 25% in the last five years. The company's growth is also quite consistent, it can be seen from its increasing production capacity from 17 million tonnes in 2007, to 20 million tons in 2011, and is projected to be 25 million tons in 2013. Despite its status as the largest cement company in the country, but the growth prospect of SMGR is still wide open given the today’s level of consumption of cement in Indonesia is still one of the lowest in Asia, which is only about 200 kilograms per capita per year.

Then recently, SMGR starts to be 'on headline' again after the company went regional by acquiring 70% stake of Thang Long from its previous owner, Gelexeminco, a local business group which is one of the largest business groups in Vietnam (probably like Indonesian Astra Group). Actually, Thang Long cement is just a small company compared with SMGR, with a production capacity of only 2.3 million tons of cement per annum, so the acquisition is not too special. Thang Long value itself was only US$ 335 million, very small compared with the market cap of SMGR that reached US$ 10 billion at the stock price of Rp15,850 per share. However, since this is the first time SMGR acquired a foreign company, then it become an amazing corporate action.

Later, SMGR will work with Gelexeminco to develop Thang Long by setting up two new cement factories in separate locations in Vietnam, so that Thang Long will have a production capacity of 6.5 million tons of cement per year, to meet Vietnam needs of the domestic cement market. However there is no information about the schedule of the construction of the factories. It would likely take a long time before the factories are ready to operate.

Although the acquisition of Thang Long is relatively ‘not a big deal’, but what's interesting is Semen Gresik’s transformation plan to become a regional cement company (South East Asia region), where Thang Long became part of the transformation. The company also plans to change its name from ‘Semen Gresik’ to ‘Semen Indonesia’. This transformation is in line with the Government's plan as a majority shareholder of SMGR to increase the national cement production, to fulfill the needs of cement due to the acceleration of infrastructure development in the country, as stipulated in the Master Plan for the Acceleration and Expansion of Economic Development (MP3EI).

And yep, other than its acquisition over Thang Long, during the year 2012, SMGR has completed two new cement plants, namely Tuban IV and Tonasa V, and in the year 2013, the company will build two more plants, each with a capacity of 3 million tons of cement per annum. Added with the production capacity of Thang Long, then the projected production capacity of 25 million tonnes of cement in 2013 become very realistic to be achieved. Well, what more could I say? This company has a bright prospect, as supported by its excellent track record in the past ten years. If there is no obstacle, SMGR is also planning to acquire Semen Baturaja, to cement its status as 'Semen Indonesia' (literally means Indonesian Cement).

Unfortunately, SMGR seems to have no more plans to acquire another overseas cement company (some says that SMGR will acquire a Myanmar cement company, but so far it was just a rumor). If compared with corporate actions undertaken by fellow SOEs like Garuda Indonesia (GIAA), then the next steps to be taken by SMGR did not sound too bombastic, including SMGR also do not plans to become a sponsor for Manchester United or Chelsea. But if GIAA is still striving with its poor financial performance, then since the beginning SMGR is already a good company.

And what about the Indocement (INTP)?

INTP is the second largest cement producer in Indonesia behind SMGR, with a production capacity of about 18 million tonnes at the end of 2011. Company’s cement factories located in Citeureup (West Java), Cirebon (West Java), and Tarjun (South Kalimantan). The company is controlled by Heidelberg Group, a German cement company.

Two workers in the Indocement's Semen Tiga Roda Warehouse

Like SMGR which continues to increase its production capacity, INTP also does the same. Currently the company is building a new cement plant in Citeureup with a capacity of 2 million tons per year, and is planning to build two other cement plants, one in Central Java and another outside Java Island, each with a capacity of about 2 - 2.5 million tons. For the year 2013, it is projected that the production capacity of INTP would be about 21 million tons per year, and will be 29 million tons in 2017. So we could say that this company is also growing, though not by acquiring other companies. But unlike SMGR that is focusing its growth to meet the needs of cement for the construction of infrastructure, INTP is more targeting the needs of cement for residential and housing projects that require cement in retail.

Fundamentally, both SMGR and INTP have a very good performance. So if you want to invest in either of these two companies, but still confused to choose which one, then perhaps you can consider this: If you see that the outlook for infrastructure in Indonesia is quite good, and that the progress of MP3EI will run smoothly, then the choice is SMGR. But if you see that the increase in demand for cement in the future will be driven by growth in the sector of property and residential, then the choice is INTP.

One thing, remember that the residential sector is the largest consumer of cement in Indonesia, which consumed about 70% of the national cement production in 2011, so in this case INTP may be more attractive. However, if viewed from the historical performance of the two companies, SMGR is superior because of its slightly better financial performance if compared to INTP, including the dividend payout ratio is also larger, reaching 50% of annual net income (while INTP only 30%).

So, what about Holcim Indonesia (SMCB)? Well, considering that the company's performance is still not good enough when compared with its two 'senior', then I think that you can not invest in this cement company.

Okay, here are some key outlook related to the cement industry in Indonesia in the future:

  1. The demand for cement in the domestic market continues to increase from year to year, including grew about 14% in 2012. While on the other hand, the level of cement consumption in Indonesia is still one of the lowest in Asia, only bigger than India and the Philippines.
  2. The law related to the acquisition of land which was passed by Parliament in December 2011, allowing cement companies to accelerate the progress of land acquisition to establish a cement factory, so now SMGR et al were able to increase its cement production capacity more quickly than before.
  3. Growth in the number of middle class people in Indonesia is expected to continue in 2013, in which the existence of these people continue to encourage property companies to build high-end residential buildings, which would require the supply of cement.
  4. There is an interesting prospect of the possibility of increased infrastructure development in Indonesia in the next few years.
In the last four years, precisely since February 2009, when the market began to recover after the global crisis in 2008, SMGR and INTP has gained 350%, respectively, aka quite significant, and it was in line with the improved performance of both companies from year to year, so both stocks are quite decent for long term investment, only you have to wait until the market is collapsed so you could collect the stock at low prices. But if you are more interested in using SMGR and INTP for trading, then well, I don’t know what to say.

SMGR in 9M12 performance rating : AAA
INTP in 9M12 performance rating : AAA

Original article was written at December 27, 2012

No comments: