INTP - Waiting for momentum to bounce back

• INTP’s 1H22 net profit fell 50.3% YoY to Rp292bn, representing 32.7% of our FY estimate 

• We expect domestic cement sales to grow 3% YoY in 2022 amid property recovery and infrastructure development. To ease margin squeeze from strong energy prices and USD, INTP has raised prices, while reducing fixed costs, managing efficient kilns, increasing the usage of alternative fuels and low CV coal, optimizing DMO coal supply 

• Reiterate our BUY call with 14.1% 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 50.3% YoY to Rp292bn in 1H22, accounting for 32.7%/17.7% of our/consensus FY forecasts. Despite lower sales volume by 6.2% YoY, net revenues grew 3.7% YoY to Rp6.91tn in 1H22 on the back of higher blended ASP by 10.5% YoY. However, gross margin contracted from 31.4% in 1H21 to 25.6% in 1H22, mainly caused by soaring coal prices. Furthermore, operating margin declined from 9.1% in 1H21 to 3.8% in 1H22 as operating expenses inched up 1.2% YoY to Rp1.5tn, particularly derived from depreciation due to lease of Banyuwangi Grinding Plant as well as delivery, loading and transportation in line with fuel increase that partly compensated by lower advertising and promotion. Moreover, finance income shrunk 55.6% YoY to Rp43bn in 1H22 amid lower interest rates as well as cash and cash equivalents. Nevertheless, it booked higher forex gain in 2Q22. Meanwhile, balance sheet remained robust with net cash position in 1H22. Improving outlook despite challenges We expect domestic cement consumption to grow 3% 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, strong commodity prices, and Omnibus Law implementation. Furthermore, we believe that bulk cement demands will continue to rise in 2H22 amidst accelerating construction activities for infrastructure and commercial projects. Moreover, we see that new 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 56.5%, resulting in stiff competition. Meanwhile, INTP strives to maintain market share in home market amid aggressiveness of second‐tier brands. Nevertheless, we deem that low utilization rate, lack of distribution channels and alternative fuels usage will hamper performance of smaller players. In addition, we view that surging energy costs, first phase implementation of carbon tax for coal‐fired power plant, and ODOL policy will be the main challenges for cement industry. Navigating headwinds To reduce margin pressures stemming from soaring coal and oil prices as well as USD appreciation, INTP has raised selling prices, while evaluating pricing situations in each area. Furthermore, the company has secured some of the required amount of coal needs throughout this year at DMO price and seeks to expand partnerships for DMO access. We also anticipate that cement price dynamics will depend on energy cost movements in 2H22. Moreover, INTP strives to maintain EBITDA margin at c.20%. The company also focuses on improving operational excellence, fixed cost reduction, managing efficient kiln utilization, and digital transformation. It continues to implement cost leadership strategy, namely higher usage of alternative fuels that are targeted to reach 25% by 2025, low CV coal, and alternative raw materials substituting clinker, as well as renewable energy development for electricity. To anticipate intense competition, INTP will leverage eco‐brand “Rajawali” with contribution of c.10% of total sales. Meanwhile, the company will improve footprints by expanding its market and distribution from Western to Eastern Java and Bali. Thus, it is increasing supply capability by leasing a grinding plant in Banyuwangi with capacity of 1.8mn tons. Going forward, INTP aims to improve 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 Rp10,500 per share. Note that the stock is currently traded at a 2022 PER of 47.1x and EV/EBITDA of 15.9x. 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.