SMCB - Strengthening collaboration to sustain growth

• SMCB’s 1Q22 net profit rose 13.8% YoY to Rp178bn, representing 21.2% of our FY estimate 

• We expect domestic cement sales to grow 5% YoY in 2022 amid property recovery and infrastructure development. To mitigate surging energy prices, SMCB has raised selling prices, while focusing on increasing the use of alternative fuels and raw materials to enhance efficiency, market expansions, and product innovations 

• Reiterate our BUY call with 21.1% upside potential on a 12‐month view, backed by 1) economic rebound along with supportive fiscal policy; 2) higher selling prices; 3) synergy with SMGR and TCC; as well as 4) improving capital structure 

In line with our expectation SMCB’s net profit increased 13.8% YoY to Rp178bn in 1Q22, accounting for 21.2% of our FY forecast. Revenue grew 13.4% YoY to Rp2.90tn in 1Q22 as sales volume rose 7.3% YoY to 3.39mn tons. However, gross margin contracted from 25.7% in 1Q21 to 21.2% in 1Q22, mainly caused by higher manufacturing costs in line with soaring coal prices. Amid cost transformation program and synergy with SMGR, operating expenses were down 3.8% YoY to Rp290bn in 1Q22 due to lower salaries, wages and allowances, compensating higher distribution and allowance for expected credit losses. Furthermore, finance costs tumbled 49.2% YoY to Rp69bn in 1Q22 on the back of lower debts and interest rates. Meanwhile, capital structure improved with net gearing decreased from 111.9% in 1Q21 to 38.7% in 1Q22 following rights issue. Solid demands from infrastructure and property We maintain our domestic cement consumption growth assumption of 5% YoY in 2022 amid property sector recovery and acceleration of infrastructure development, supported by improving economy along with eased mobility restrictions, low interest rates, value‐added tax waiver on property purchase, and Omnibus Law implementation. However, we anticipate cement oversupply to reach c.50mn tons this year with utilization rate of 57.6%, thus resulting in intense competition. Furthermore, we expect challenges to come from surging energy prices and the implementation of ODOL policy by early 2023 that will increase logistics cost as well as carbon tax. In the midst of supply and demand dynamics, cement producers will boost exports to optimize utilization rate. Headwinds from soaring energy costs To mitigate surging coal and oil prices that will lead to margin squeeze, SMCB has raised selling prices. Furthermore, the company focuses on sustainable initiatives, namely developing digital application to improve operational excellence, increasing the use of alternative fuels and raw materials to enhance efficiency as well as reduce carbon emission. SMCB has managed to boost the usage of alternative fuels to 11.4% compared to 8.8% a year prior. Moreover, the company participates in national strategic projects, including Suralaya coal‐fired power plant in Banten and Jakarta‐Bandung High Speed Railway spanning 142.3km. In addition, SMCB continues its synergy with TCC and SMGR in terms of 1) market expansions; 2) achieving economies of scale by ramping up production; 3) product innovations; 4) integrated procurement, marketing, and distribution; 5) strengthening ready mix segment; as well as 6) funding and tech supports. Meanwhile, SMCB has introduced LocooCrete as a low CO2 emission concrete innovation. Reiterate BUY on the back of economic recovery and improving capital structure We maintain our BUY recommendation with a DCF‐based price target of Rp1,950 per share. SMCB’s share price is currently traded at a 2022 PER of 18.7x and EV/EBITDA of 9.0x. We remain optimistic with its outlook, driven by 1) property recovery and infrastructure development amid economic rebound along with supportive fiscal policy; 2) selling price hikes; 3) synergy with SMGR and TCC; as well as 4) improving capital structure post rights issue. However, we note several downside risks, stemming from 1) margin squeeze due to soaring coal and oil prices; 2) persistent supply glut with stiff competition; as well as 3) aggressive rate hikes