• INTP and SMGR reported their 2Q17 results. Both companies missed ours and consensus' earning forecasts, coming in at 30-31% of FY17E estimates, mainly due to fuel & power cost spike that we presume is related to coal. Their top-lines performed relatively better, in-line at ~45% of FY17E estimates, bearing in mind that the pull-forward effect of Lebaran is now fully captured in 2Q instead of 3Q; we did expect for 2H17 to be the stronger half in the absence of Lebaran as well as the govt's backloaded infra spending.
• SMGR headline is optically better, but underlying cement sales of both companies similar at -16-17% YoY for the quarter. Although INTP and SMGR's headline revenue growth of -17% and -2% YoY are starkly contrasting, their underlying cement sales performance is actually similar. SMGR's cement sales also dropped 16% YoY, but the rest of the growth was made up by: (1) bringing in additional revenue from a cement distributor subsidiary into the consolidated financials; and (2) a chunky YoY tripling of precast cement revenue.
• INTP 2Q17: revenue -17% YoY, -6% QoQ; EBITDA -46% YoY, -22% QoQ, NPAT -72% YoY, -17% QoQ
• SMGR 2Q17: revenue -2% YoY, -1% QoQ; EBITDA -31% YoY, -2% QoQ, NPAT -63% YoY, -30% QoQ
Impact
• Weak revenue momentum mostly due to ASP, not Lebaran volumes. This year's Lebaran shift into 2Q, instead of 3Q in previous years, makes this result season rather ambiguous. However, we observed that the volumes this quarter is only down by 5% and 7% YoY for INTP and SMGR, respectively, which is relatively acceptable given the seasonality shift. On the other hand, their ASPs have respectively declined by 12% and 9% YoY in 2Q17.
• QoQ trends indicate stabilizing/improving top line momentum. Despite the seasonally weak Lebaran period, the 2Q performed relatively well as revenue was only down by mid single digits. We expect the better demand environment in 2H17, which should further decelerate the ASP downturns.
• Coal price damaging margins and earnings. INTP and SMGR's gross margins slumped by 6ppt and 10ppt, respectively, on the back of rising fuel and power costs. Cash cost increased by 8% and 13% YoY on a per-tonne basis, respectively as both saw a soaring in fuel cost of mid to high teens per tonne.
• SMGR additional revenues from subsidiary and precast helping overall performance. Management has conveyed that the company has added an additional revenue element from one of its cement distributor subsidiaries in 1H17, which was absent in 2016. Furthermore, we noticed that the ready-mix-concrete or precast sales tripled on a YoY basis, contributing 6% of total revenue in 1H17 vs 2% last year.
Action and recommendation
• We maintain overweight on the sector as it seems that these earnings misses have been priced in by most investors. Our preferred play is INTP for an incrementally more conducive supply-demand environment in 2H17 as more plants come online in ex-Java.
Stocks mentioned:
Indocement (INTP IJ, Rp17,650, Outperform, TP: Rp18,800)
Semen Indonesia (SMGR IJ, Rp10,050, Neutral, TP: Rp9,700)
Analyst(s)
PT Macquarie Sekuritas Indonesia
Nathania Nurhalim
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