INTP - Expecting improvement from recovery year

• INTP’s 1Q22 net profit fell 48.0% YoY to Rp183bn, representing 10.7% of our FY forecast 

• We expect domestic cement sales to grow 5% YoY in 2022 amid property recovery and infrastructure development. Strong energy prices and USD will result in margin squeeze. INTP has raised prices, while improving operational excellence, reducing fixed costs, managing efficient kilns, as well as increasing the usage of alternative fuels and low CV coal 

• Reiterate our BUY call with 19.7% upside potential on a 12‐month view, backed by 1) economic recovery along with fiscal stimulus; 2) higher selling prices and cost leadership strategy; as well as 3) robust balance sheet 

Below expectations INTP’s net profit plunged 48.0% YoY to Rp183bn in 1Q22, accounting for 10.7%/10.5% of our/consensus FY estimates. Net revenues grew 3.5% YoY to Rp3.56tn in 1Q22. However, gross margin contracted from 32.0% in 1Q21 to 27.0% in 1Q22, mainly caused by soaring coal prices. Furthermore, operating margin declined from 10.6% in 1Q21 to 5.2% in 1Q22 as operating expenses increased 5.7% YoY to Rp777bn, particularly derived from delivery, loading and transportation, depreciation, as well as professional fees that partly compensated by lower allowance for impairment loss on trade receivables as well as advertising and promotion. Moreover, finance income tumbled 49.3% YoY to Rp26bn in 1Q22 amid lower interest rates as well as cash and cash equivalents. Meanwhile, balance sheet remained robust with net cash position in 1Q22. Recovery is happening, but challenges are coming We maintain our domestic cement consumption growth assumption of 5% YoY in 2022 amid property sector recovery and infrastructure development, supported by improving economy in line with eased mobility restrictions, low interest rates, value‐added tax waiver for property purchase, soaring commodity prices, and Omnibus Law implementation. Furthermore, we believe that the initiation of Nusantara Capital City development will be one of the long‐term catalysts for cement industry. However, we anticipate oversupply to reach c.50mn tons this year with utilization rate of 57.3%, leading to stiff competition. Meanwhile, INTP aims to maintain its market share in home market amidst aggressiveness of second‐tier brands and a new player in Central Java that has commenced commercial production since 4Q21. Moreover, we see that surging coal prices will still be the prime challenge, in addition to the implementation of first phase of carbon tax for coal fired power plant this year and ODOL policy in 2023, in which INTP is preparing new logistics strategies. Turning headwinds into tailwinds We expect that soaring coal and oil prices coupled with USD appreciation will result in margin pressures. To ease the burden, INTP has raised selling prices since March 2022 for both bag and bulk cement, while closely monitoring how competitors would response. Meanwhile, the government has committed to facilitate the company in procuring coal at DMO price. Furthermore, INTP focuses on improving operational excellence, fixed cost reduction program, efficient kiln management, and digital transformation. The company also continues to implement cost leadership strategy, namely higher use of alternative fuels that are targeted to reach 25% by 2025, low CV coal, alternative raw materials substituting clinker, and renewable energy development for electricity. Moreover, INTP has introduced hydraulic cement, slag cement, and PCC in order to gradually replace OPC. To anticipate competition, the company will leverage its fighting brand with contribution of c.10% of total sales. In addition, INTP continues its digital transformation for sales by launching TiroMax mobile app, engaging in community platform “Masterumah.id”, and optimizing supply chain. To increase market penetration, the company has acquired a terminal in Samarinda and added more bulk fleets. Meanwhile, INTP aims to expand sustainability strategy, distribution channels, automation process, as well as explore a possibility of merger and acquisition for synergy. Reiterate BUY on the back of improving economy and robust balance sheet We maintain our BUY call with a lower DCF‐based price target of Rp12,000 per share. Note that the stock is currently traded at a 2022 PER of 41.4x and EV/EBITDA of 14.9x. We remain optimistic with INTP’s outlook, driven by 1) improving economy along with fiscal stimulus that will boost property recovery and infrastructure development; 2) higher selling prices as well as strategic initiatives including cost leadership and focus on home market; as well as 3) robust balance sheet with net cash position. On the other hand, we note several downside risks to our recommendation, namely 1) lower‐than‐expected sales volume and persistent oversupply that leads to intense competition particularly in its main market, thus limiting ability to raise prices; 2) risk of margin squeeze due to surging energy prices; as well as 3) aggressive interest rate hikes and USD appreciation.