Cement

Downgrade sector to Neutral on weak ASP and lower demand; cut our FY24F/25F EPS by 20%-21%

• Given weak ASP, we lower our FY24F/ FY25F EPS by 21%/20% as we cut our FY24 ASP hike assumption to 0% to -1.5% (vs. +1%-2% prev.).
• We also expect lower FY24F/FY25F vol growth of 1.5%/2.5% (from 2.6%/3%), as we observe slower bagged cement market recovery.
• We downgrade our sector rating to Neutral from Overweight; we switch our top pick to INTP, but with an 16% lower TP of Rp 8,400.

Weak volumes in 4M24 led to lower ASP

Cement producers recorded earnings misses in 1Q24, with SMGR/INTP’s net profit only reaching 17%/ 11% of our FY24F estimate/the consensus vs the 1Q seasonal average of 19%, due mostly to lower ASP. Contrary to our thesis of stable ASPs, SMGR/INTP recorded ASP declines of -3%/-9% yoy in 1Q24 (-3%/-5% qoq. On the volume front, SMGR sold 11.1Mt in 4M24 (-3.4% yoy, including exports), while INTP sold 5.1 Mt (+7% yoy, or -0.8% yoy if we exclude the newly-acquired Grobogan). INTP’s 4M24 volume is inline at 26% of our FY24 projection, while SMGR’s is slightly below our expectation at 27% of the FY24F target. Our price tracker indicates +2/-1% ASP changes for SMGR/INTP from Mar24 to May24, yet based on our discussions with the companies, pricing is still under pressure.

Cutting our EPS estimates by 20%-23% due to weak ASP and lower vol

Given the current volume and ASP trajectory, we now see that our initial thesis for a stable ASP outlook is no longer valid. The current weak demand has led producers to initiate price discounts to secure sales volume. As such, we reduce our FY24F ASP hike assumption to 0% to -1.5% from +1-2% prev. In addition, we also reduce our long-term ASP growth estimates to 1.5%-2.5% from 2-3% prev. as we expect price competition to persist while additional capacity is still to come to market (i.e., Hongshi). We also trim our FY24F/FY25F vol growth to 1.5%/2.5% from 2.6%/3%, as we expect recovery in the bagged cement segment to take longer to materialize due to the weak property market. As such, we cut our FY24F/FY25F revenue by 3%/4% due to lower ASP expectations and lower vol growth, our FY24F/FY25F EBITDA by 11%/10%, and our FY24F/FY25F EPS by 21%/20%.

Downgrade the sector to Neutral with lower TPs; INTP is our new top pick

Due to lower ASP and volume growth expectations, we downgrade our sector rating to Neutral from Overweight. While we see limited downside risk following the 14%-22% share price correction in the past month and as valuations are now at -2SD (based on EV/t), our Neutral sector rating reflects our view that ASP pressure stemming from weak volume sales will persist in FY24, with an anticipated recovery only in FY25. Our FY25 outlook indicates a rebound in volume growth and a return of ASP to FY23 levels. We are switching our top pick to INTP (Buy, with a 16% lower TP of Rp 8,400), due to: 1) cost savings from Grobogan, which we expect to reduce transportation costs/ton by 2.5%-3%, and 2) less impact on the company from the upcoming Hongshi Aceh plant. We also maintain our Buy rating on SMGR, with a 22% lower TP of Rp 6,700. Potential upside risks to our call include a faster recovery in the property sector and the ability of cement players to increase ASP. Downside risks include the return of price wars and slower progress on IKN. 

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