Company Background

PT Indocement Tunggal Prakarsa Tbk (INTP) is the second largest cement producer in Indonesia, second only to the state-owned Semen Indonesia (Persero) (SMGR). INTP famous brand “Tiga Roda” is easily one of the most recognizable cement brands in Indonesia. INTP’s main revenues come from cement (86%), ready-mix concrete (13.2%) and aggregate (0.8%). It also has twelve plants in West Java and one in South Kalimantan. Overall, INTP total annual production capacity reaches 24.9 mn tonnes of cement.

Investment Merits

• Strong net cash position and almost debt-free

Despite negative growth in net profit, INTP made positive net cash in 2016 and we predict the positive cash trend will continue in the future. The company’s almost debt-free policy made it nearly unaffected by changes in interest rates. It also has the lowest DER compared to competitors. Thus, should there be an industry consolidation in the future, INTP is very much in a good position in the acquisition if an opportunity arises. 

• Cost efficiency

Although partly attributed by reduced purchase prices of coal in most of 2015-2016, we are very positive on INTP’s historical success of slashing its cost of revenues and operational cost and appreciate its continuous efforts in cost efficiency. However, we expect a slight increase in COGS (3%) in 2017 due to rising price of coal.

• Product innovation and diversification

In the current climate of tight competition, INTP took a very strategic step by introducing PPC Semen Rajawali, an affordable high-quality cement, to serve the second-tier market. This is a very encouraging step to combat the price war in an increasingly tight market as INTP aims to maintain its market share. The company also launched high durability and environmentally friendly Tiga Roda (TR) Superslag Cement.

Key Risks

• Rising coal price

To a certain extent, INTP is dependent upon the use of coal as burning fuel for its kiln operations in the production of cement. Thus, the cost of revenue will increase as the price of coal goes up since around 39% of the company’s cost of revenue comes from fuel and power expenses which main material is coal.

• Infiltration by new entrants

Another risk faced by INTP is that the cement industry has become increasingly very saturated, especially in West Java Region, where most of INTP home market is (in 10M17 INTP has 47.9% market share in West Java). Infiltration by the new market entrants will lead to stiffer competition and price war.

Initiate with HOLD

We initiate our coverage on INTP with HOLD rating and target price of IDR 18,875 per share based on DCF valuation method using both terminal calculations of perpetuity growth model and EBITDA multiple. We then average the two values and priced in the dividend yield of 1.7% to arrive at the target price which implies 29.5x FY17E P/E ratio. The valuation assumes WACC of 11.9%, terminal growth rate of 5.4% and industry EBITDA multiple of 10.2x.