Cement: Bag pricing continue to improve in Nov24; A conservative outlook from SMGR meeting (NEUTRAL)

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Cement

Bag pricing continue to improve in Nov24; A conservative outlook from SMGR meeting

SMGR/INTP pricing improved by 0.4%/0.6% mom, with Semen Merdeka positioning remaining at Tier 3 albeit with pricing improvement.
We also met with SMGR management, who guides for a conservative 2025 outlook as the bag market remains challenging.
We maintain a Neutral stance for the sector amid a lack of near-term catalysts. Our top pick remains INTP (Buy, TP Rp8,800).

Nov24 Pricing: Improvement in mom basis; Merdeka is still at Tier 3

SMGR/INTP aggregate pricing improved by 0.4%/0.6% mom, bringing 3M improvement to 2.3%/3%. All SMGR and INTP products had price increases, with the exception of Semen Gresik (-1.4% mom, but on 3M still improved by 0.9%). Semen Merdeka/Semen Jempolan pricing is at a 23%/26% discount to their respective main brands, with price improvement of 2.9%/8.7% mom. This positioning is an improvement from a 26%/32% discount to the main brand in Oct24. Overall, we see improvement in bag cement pricing, yet still see SMGR’s pricing as slightly off. Additionally, we are still worried about Merdeka availability and positioning in the market, which, despite the price increase, is still priced at Tier 3 (Tier 2 discount is at 12-16% of the main brand).

KTA from SMGR Meeting: Conservative View for 2025

We met with SMGR’s management to discuss business development and the outlook for FY25. Overall, SMGR’s objective is to preserve cash flow for the rest of FY24 and guide 3%-4% sales volume growth for FY25F. It expects the cement industry will not revert back to FY23 levels yet, amid some government policies that may be put into effect by 2Q25. The bag market remains challenging until now, amid pressure in the mid-low segment. Meanwhile, it expects the 3mn housing program to not disrupt pricing in the bag market, yet it remains conservative in guiding growth from this program. On Semen Merdeka, despite the improved pricing, it admits that the market is challenging to raise prices as all cement companies are trying to cover their fixed costs in the current weak market. Hence, most players are prioritizing volume over ASP. SMGR is currently pursuing diversification that is still related to the cement business, such as waste management upstream (sourcing alternative materials for fuel), stabilization products (i.e., products to harden soft soil, which it sources the technology from TCC), chemical business (sourcing more ready-mix materials), and aggregate business (i.e., interlock brick materials). Capex for these diversifications will reach Rp1-1.5tr for the next 3 years, and management expects revenue streams to be significant by FY28F (~Rp1tr) with 20-30% EBITDA margin.

Maintain Neutral rating for sector due to lack of near-term catalysts

We maintain our Neutral rating for the sector. Despite volume recovery in the past few months, we do not see near-term catalysts that could significantly boost sales volume. Our top pick remains INTP (Buy, TP Rp8,800), which currently trades at EV/t of USD89 (-1 std dev of its 5-year mean). We have a Neutral rating for SMGR with a TP of Rp3,900. SMGR is currently trading at EV/t of US$60 (-1.5 std dev of its 5-years mean). Upside risks: 1) Significant recovery in the bag segment; 2) Less intense competition in pricing. Downside risks: 1) Growth in the bulk segment with significantly lower prices; 2) Entry of new players.

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