SMGR - Staying agile amid challenging times

• SMGR’s 1Q22 net profit rose 10.7% YoY to Rp499bn, representing 17.7% of our FY estimate 

• We expect domestic cement sales to grow 5% YoY in 2022 amid property recovery and infrastructure development. To anticipate soaring energy prices that will result in margin squeeze, SMGR has increased prices and the use of low CV coal, alternative raw materials and fuels, while applying a multi‐brand strategy as well as improving efficiency 

• Reiterate our BUY call with 34.3% upside potential on a 12‐month view, backed by 1) economic recovery along with fiscal stimulus; 2) cost transformation and synergy with SMCB; 3) strategic plant locations; 4) market leadership; and 5) lower gearing ratio 

Below expectations SMGR’s net profit grew 10.7% YoY to Rp499bn in 1Q22, accounting for 17.7%/18.3% of our/consensus FY forecasts. Revenue inched up 0.7% YoY to Rp8.14tn in 1Q22 as blended ASP escalated 7.0% YoY, while sales volume went down 5.8% YoY. Although domestic sales edged up 1.6% YoY, regional sales plunged 29.0% YoY in 1Q22 due to its focus on domestic market and coal availability. Furthermore, cost of revenue only rose 3.2% YoY to Rp5.88tn in 1Q22 on the back of tight cost control amid a 28% YoY hike in fuel and energy cost, which is lower than 88% YoY increase in average coal market price, as it was able to secure coal supply at DMO price. Meanwhile, raw material cost declined 28.5% YoY in line with muted sales volume and 1% lower average clinker factor in 1Q22. However, gross margin contracted from 29.4% in 1Q21 to 27.7% in 1Q22. Moreover, opex decreased 6.6% YoY to Rp1.24tn in 1Q22, mainly sourced from salaries, wages, employee welfare and bonuses, promotion, as well as office supplies that offset higher taxes and insurance. In addition, finance costs shrunk 26.2% YoY to Rp327bn in 1Q22 amid lower interest rates and interest‐ bearing debts. Meanwhile, DER improved from 70.0% in 1Q21 to 46.9% in 1Q22. Anticipating solid demand recovery SMGR’s cement sales nationwide inched down 1.2% YoY to 9.62mn tons in 4M22 ahead of Eid holiday, while exports declined 37.6% YoY to 1.66mn tons. We maintain our domestic cement consumption growth assumption of 5% YoY in 2022 amid property sector recovery and infrastructure development, mainly supported by improving economy, low interest rates, value‐added tax waiver on property purchase, sizeable infrastructure budget, and Omnibus Law implementation. We also believe that new capital city ‘Nusantara’ development will bolster cement demands in the long run. However, we anticipate headwinds are coming from oversupplied market that leads to intense competition particularly from second‐tier brands, further decrease in exports, surging coal prices, as well as the implementation of ODOL policy by 2023 and carbon tax. Meanwhile, despite DMO pricing scheme, many players are facing difficulties in obtaining coal supply. In a bid to contain headwinds To anticipate soaring coal and oil prices that will result in margin squeeze, SMGR has increased selling prices, the use of low CV coal, and secured long‐term contracts with coal suppliers. Furthemore, the company continues its strategic initiatives, namely 1) applying a multi‐brand portfolio strategy and expanding distribution channels; 2) improving operational excellence to enhance efficiency by reducing clinker factors, increasing the usage of alternative raw materials and fuels, optimizing coal procurement management; as well as 3) implementing agile and lean operating model. SMGR focuses on improving profitability, while preserving its market leadership by optimizing eco brand. To boost domestic sales, the company is developing a wide array of digital platforms, such as SobatBangun, AksesToko, and SIG online store. In addition, SMGR will utilize sustainable financing and exercise debt reprofiling to reduce finance costs. Reiterate BUY on the back of improving economy and higher selling prices We maintain our BUY recommendation with a lower DCF‐based price target of Rp9,000 per share. The stock is currently traded at a 2022 EV/EBITDA of 6.6x and PER of 15.6x, translating into 1.6stdev below its 5‐year historical mean, which we consider to be relatively undemanding. We remain sanguine on SMGR’s outlook, driven by 1) improving economy along with low interest rates and fiscal stimulus that will accelerate property recovery and infrastructure development; 2) higher selling prices coupled with cost transformation and synergy with SMCB; 3) strategic plant locations and extensive distribution networks; 4) market leadership with relatively high utilization rate; as well as 5) improved leverage ratio. However, we note several downside risks, including 1) lower‐than‐expected sales volume and selling prices; 2) soaring energy costs; as well as 3) aggressive rate hikes.