CSA Research Report - INTP

High 52-week : Rp.24.300

Low 52-week : Rp.16.000

NEUTRAL

Target Price Rp.20.700

Having experience more than 39 years, Indocement Tunggal Prakarsa (INTP IJ EQUITY) manages to be a leading cement producers in Indonesia with current capacity 24.9 million tons per year. Plants located in Citeureup, Palimanan and Tarjun, Indocement to seize cement demand throughout Indonesia amid oversupply concerns among cement producers.

One of Indonesia’s leading cement producers. Indocement established in 1985 through mergers of 6 companies which consists of 8 plants. In 1989, INTP acquired the 9th plant and listed its shares in IDX (Jakarta Stock Exchange). In 2001, Heidelberg Cement Group (HC) became majority shareholders through its subsidiary, Kimmeridge Enterprise Pte Ltd. Later in 2006, HC South East Asia GmbH mergers with HC AG and controlled 65.14% stake of INTP. Strong cement brand names. INTP produces cement under “Semen Tiga Roda” brand name since August 1975. Until 9M2015, “Semen Tiga Roda” has been sold 12.3 million tons or contributes 85% of revenue. At the same period, INTP gains the highest market share in Greater Jakarta, Banten and West Java Provinces or 40.1%, 45.2% and 52%, respectively. This is translating to 36.2% market share in Java or 27.8% in Indonesia. Expansion is on track. INTP completed its 13th expansion plant in 4Q2015 with additional capacity 4.4 million tons production per year. By this expansion, INTP’s utilization rate of cement plants dropped to 65% which has been anticipated by the management to seize higher demand going forward.

Valuation. Based on 9M2015 performance, we forecast INTP revenue to Rp.18.2 Trillion in 2015 and Rp.19.1 Trillion in 2016. Trading at P/E 2015F 14.77x and P/E 2016F 13.94x we iterate NEUTRAL for INTP with target price Rp.20.700.

Weak Global Economic Condition – worsened with lower commodity prices Late of 2015, economists expected The Fed to take step on Fed Fund Rate hike for the first time since 2008. Few economic indicators has shown improvements, i.e. unemployment rate and inflation rate however it seemed too early to move upward. Across Ocean Pacific, China to struggle land its economics smoothly from previously having a double digit GDP growth to 6% average besides its attempts to stabilize yuan from further depreciation and massive capital outflow. Meanwhile, surprisingly, Bank of Japan announced to cut its reference rate below 0 to excite domestic consumption. Globally, most of central banks stimulates growth through reference rate cut or lower reserve requirements. In 2016, China’s economic slowdown will be trespassed by India (Exhibit 1). Moreover, Fed Fund Rate hike dragged down commodity prices resulting inflation in dollar index over other safe haven instruments, which impacting IDR volatility. From 2012 to January 2016, USD/IDR strengthened more than 50% drained up foreign reserves (Exhibit 2).

Exhibit 1. OECD Economic Growth

Source: OECD

Exhibit 2. Foreign Reserves (LHS) and USD/IDR (RHS)

Source: BI, Bloomberg

Supports by government spending on infrastructure Under Mr. Joko “Jokowi” Widodo administration, fuel subsidy price has been adjusted more than 6

times referring crude oil market price as its benchmark. He succeeded release government budget (APBN) burden of fuel subsidy and diverted to productive sector – infrastructure related sectors. In government budget 2015, fuel subsidy budget significantly lower than in 2014 (Exhibit 3). In 2015 performance, infrastructure budget realization increase significantly than in 2014 as government effort to attract investment and bureaucracy reform (Exhibit 4).

Exhibit 3. Tax Revenue and Fuel Subsidy Source: MoF

Exhibit 4. Infrastructure Budget Realization

Source: MoF

2004 2006 2008 2010 2012 2014

0.0

50.0

100.0

150.0

200.0

250.0

300.0

0

200

400

600

800

1000

1200

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Tax Revenue (LHS) Fuel Subsidy (RHS)

0

50

100

150

200

250

300

350

2009 2010 2011 2012 2013 2014 2015B

Infrastructure Budget Realization

Expected to spur growth

In 2015, Indonesia recorded the slowest pace of economic growth since 2009 of only stood at 4.79% y-y, under 4 years average of around 5.3% per annum. In Feb 2016, inflation to ease of only 4.42% y-y along with low commodity prices and blended economic stimulus through monetary and fiscal policies (Exhibit 5). Besides external economic conditions, domestic economic condition takes important part on slowing growth. Government decided to determine fixed price of fuel subsidy thus the volatility in the crude oil market price will directly impact to purchasing power which finally resulting weak demand. In 2015, under Mr. Joko “Jokowi” Widodo administration, fuel subsidy prices has been adjusted five times. The latest adjustment was in January 2016. As fuel subsidy price volatiles within 2015 to 2016 period, consumer confidence level reached lowest level in Oct 2015 and rebounded in 2016 as inflation eased (Exhibit 6).

Exhibit 5. Inflation & Real GDP Growth Source: Bloomberg

Exhibit 6. Consumer Confidence & Real Interest

Source: BI

Cement Sector – Oversupply haunts Driven by higher domestic consumption steadily since 2003, provides room for growth by adding up additional capacity among players in the industry. Nevertheless, capacity expansion plan had been formulized before global turmoil struck emerging market especially in BRICs. Over the last decade, starting from 2009 domestic capacity expansion CAGR 9% per year or more than one and half times of 2009 capacity (Exhibit 7) with utilization rate stands at 76%. Based on data from 2011 to 2015 (Exhibit 8), cyclical of cement sales in a year with lowest sales are in fasting and festive months.

Exhibit 7. Domestic Consumption vs Capacity

Source: ASI, Bloomberg

Exhibit 8. Cyclic of Cement Sales

Source: ASI, Company Presentation

2.00%

3.00%

4.00%

5.00%

6.00%

7.00%

8.00%

9.00%

10.00%

Jan-12 Jun-12 Nov-12 Apr-13 Sep-13 Feb-14 Jul-14 Dec-14 May-15 Oct-15

Inflation % (y-y) Average Inflation % (y-y) Real GDP Growth % (y-y)

-3.00%

-2.00%

-1.00%

0.00%

1.00%

2.00%

3.00%

4.00%

5.00%

0

20

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Jan

-12

Ap

r-1

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Jul-

12

Oct

-12

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-13

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r-1

3

Jul-

13

Oct

-13

Jan

-14

Ap

r-1

4

Jul-

14

Oct

-14

Jan

-15

Ap

r-1

5

Jul-

15

Oct

-15

Consumer Confidence (LHS) Real Interest (RHS)

Property Sector – minimum positive sentiment Most of property developer companies booked lower-than-expected marketing sales in 2015. LTV (Loan to Value) macro prudential policy implementation in 2013 leads to weak property demand besides higher inflation, higher interest rate and IDR volatility. In 2016, the Government expects the Tax Amnesty Act could be approved and signed by the House of Representatives to attract local-capital from overseas. In February 2016, OJK requests banks to lower its lending and funding rate which means positive sentiment for property sector. However, as we see it is still lack of positive sentiment of growth.

Indocement at a glance

Indocement officially operated its first plant in August 1975. Over the last 39 years, Indocement has become one of the largest cement producers in Indonesia. The Company was incorporated on January 16, 1985 through the merger of six cement companies, which at the same time owned eight plants. As of December 31, 2014, Indocement’s annual installed design capacity amounted to 20.5 million tons of cement, 5.0 million m3 of RMC, with 41 batching plants and 706 mixer trucks. Aggregates production capacity amounted to 2.8 million tons per year, with reserves of 80 million tons from its two quarries. In addition of cement sales, Indocement through PT Pionirbeton Industri that produces ready mix concrete, sold 3.9 million m3 of RMC and making Indocement a market leader for RMC business in Indonesia.

Exhibit 9. Company Milestones Source: Company Presentation

•National wide distribution channels•Strong brand name of "Semen Tiga Roda"•Financially healthy and has second biggest market share

Strengths

•Lack of control over cement price•IDR volatiles impact to COGSWeaknesses

•Government infrastructure projects•Lower commodity pricesOpportunities

•Domestic oversupply•Increasing competition in cement industryThreats

Business Structure Indocement currently operates 12 integrated plants that consist of klins and associated grinding mills, in three locations. It has nine plants in Citeureup Factory, Bogor, West Java, two in Palimanan, oCirebon, West Java, and one plant in Tarjun, Kotabaru, South Kalimantan. Total installed design capacity is 20.5 million tons of cement per year.

Exhibit 10. Business Structures Source: Company Presentation

SWOT Analysis

Exhibit 11. SWOT Analysis

Market Share As of 9M 2015 INTP market share in Indonesia drops to 27.8% from previously 30.2% in 9M2014. Meanwhile, its market share in Banten slightly increase to 45.2% from last year 43.4%. INTP under “Semen Tiga Roda” brand name is a market leader for cement sales in Greater Jakarta, Banten and West Java. Going forward, we expect its strong brand name, imminent distribution channel around West Java would ensure INTP’s market share.

Exhibit 12. INTP market share as of 9M2015 Source: Company Presentation

Exhibit 13. INTP market share as of 9M2014

Source: Company Presentation

Profit Loss Statement INTP revenue dominantly contributed by cement sales (Exhibit 14), with increasing in ready-mix concrete in 2013 and 2014. Average cement sales contribution to INTP revenue is 88% in 5 years. Meanwhile in cost structure, fuel cost and raw material contributed 27% and 26% of COGS (Exhibit 15), respectively. Going forward, we expect INTP would manage its COGS and maintain its gross margin in certain level with positive sentiment on already-operated efficient plant in Citeureup.

Exhibit 14. INTP Segmented Revenue

Source: Bloomberg

Exhibit 15. Cost Structure

Source: Company Presentation

Strong Balance Sheet INTP has strong balance sheet with cash and cash equivalents increases over year. In 2014, INTP has Rp.11.3 Trillion cash and decreases in 9M2015 to Rp.6.5 Trillion. In recent week, OJK to cap deposit rate which will be impacted to interest income for INTP. INTP has strong balance sheet with gearing is net cash.

27%

17%

26%

20%

10%

Fuel Cost Electricity Raw Material Fabrication Labor

Key Assumptions – Volume and Prices

Key Assumptions – Production Volume

DCF Assumptions

Risk Free Rate 8.1% Stage Two 7.0%

Market Premium 8.4% 9.0%

Stock Beta 1.109 1.00

Cost Of Equity 17.4% 16.0%

Terminal Growth Rate 2.00%

Debt Portion 0.6% Stage Two 1.0%

Equity Portion 99.4% 99.0%

Cost of Debt 14% 10%

Tax 25% 25%

WACC 17.3% 15.9%

FREE CASH FLOW TO EQUITY

Periods 0 1 2 3 4 5

Years 2015F 2016F 2017F 2018F 2019F 2020F

EBIT x (1 - tax) 3,854.2 4,052.7 4,268.9 4,574.5 4,734.3 5,013.7

Less: Capital Expenditure (2,432.2) (450.0) (472.5) (496.1) (520.9) (547.0)

Changes in Working Capital (1,668.7) 3,697.5 3,876.3 4,096.4 4,434.4 4,629.0

Add: Depreciation & Amortization 1,093.4 1,113.1 1,133.9 1,155.7 1,178.6 1,202.6

FCFE 846.7 8,413.33 8,806.60 9,330.40 9,826.37 10,298.36

Discount Factor 1.00 1.17 1.38 1.62 1.90 2.23

PV of FCFE 846.7 7,169.7 6,395.5 5,774.3 5,182.3 4,628.4

Terminal Value 75,489.2

Sum of PV of FCFE 29,150.2 TP 2015 PE TP 2016 PE

PV of Terminal Value 33,927.3 14.77 13.94

Add: Cash & Marketable Sec 13,285.0

Less: Debt 160.4

76,202.0

Shares Outstanding (million) 3,681.2

Fair Value 20.70

Target Price 20,700