2Q18 Results

We were somewhat startled by SMGR 2Q18 result in which revenues reached IDR 6.7 bn (5.9% YoY, 1.1% QoQ), unperturbed by fewer working days due to Eid holiday in June and lower sales volume (-1.5% QoQ). Margins were expanded substantially with GPM ticked up to 31.1% (vs 25.9% in 1Q18, 30.3% in 2Q17) and OPM to 14.3% (vs 11.3% in 1Q18, 11.9% in 2Q17) while NPM reached 8.4% (vs 6.2% in 1Q18, 5.5% in 2Q17). It seems to us that SMGR chose margin improvement over maintaining market share, which at the end of 1H18 shrunk 189 bps to 39.4%.

As management explained in 2Q earnings call, this can be considered as an immediate result of strategic initiatives that SMGR undertook to stay ahead of the game.

For instance, Marketing and Supply Chains are now centralized on the holding company level and are directly supervised by one director to achieve supply chain optimization and to eradicate brand cannibalization.

Furthermore, strategic procurement, particularly coal, is also centralized and operational efficiency is attained through transformation in cost structure. Consequently, COGS/ton declined by 4.5% QoQ, meanwhile OPEX decreased by 3% YoY.