Indocement Tunggal Prakarsa (INTP IJ) Long journey of recovery
SELL with upgraded TP of IDR14,500. INTP is currently trading at FY19 P/E of 55.9x (+3.7 trailing 10-year SD). Despite gaining positive momentum post-consolidation, we believe such premium valuation is undeserved as we believe INTP is still in the initial recovery phase. We expect profitability to grow at slow pace and still far towards 2017 level, mainly due to suboptimal utilization rate and logistic efficiency.
Lower utilization limits room for ASP growth. Following the consolidation in the industry, we expect domestic ASP to increase by 4-5% in 2019. INTP will also benefited from it, but at a lower scale than SMGR (without taking SMCB into account) due to lower utilization rate. Hence, we expect INTP ASP to grow at 4% and revise up our FY19-20 revenue estimates accordingly.
Slight upper adjustment in gross margin. We revise up our FY19-20 gross margin estimate a bit, as we believe INTP will benefit from raw material efficiency through clinker factor reduction, in which INTP has better position than SMGR due to higher bag contribution, coupled with expected decline in low CV coal price.
Expecting logistic efficiency to improve.. Due to Tarjun plant overhaul, INTP logistic cost shares to revenue reached highest point since 2009 at 15%. Nevertheless, as the situation has been resolved, we expect it to improve, at least revert to 2017 level at 13.5%. As such, we revise up our FY19-20 operating and net profit margin estimates to factor it into our model.
&..but it will still far behind SMGR level. As INTP facilities are more concentrated in Java, there are two reasons that hinder INTP to reach SMGR level of logistic efficiency: 1) SMGR’s geographically diverse facilities and 2) more exposure to Over-dimension and Overload (ODOL) regulatory risk. As cement players (including INTP) are currently reluctant to spend lavish capex, we expect SMGR dominance in this area will persist, at least throughout 2019.
