Semen Indonesia (SMGR IJ): Taheiyo likely to acquire a 15% stake in SBI
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What’s new? Local media (CNBC Indonesia) reported that Semen Indonesia, SBI (previously Holcim Indonesia), and Taheiyo Cement have signed a definitive agreement on their partnership with preliminary details as follows:
•Taiheiyo Cement plans to acquire a minimum of 15% of Solusi Bangun Indonesia’s (SBI) total shares issued through a rights issue process, which is scheduled sometime in July 2021. SMGR aims USD220m (c.IDR3.2tn) in proceeds from this transaction, thus translating into around IDR2,300/share exercise price or 61% higher than SMCB’s (SBI) closing price yesterday. Worth noting that SMGR acquired an 80% stake in SBI in 2019 at an exercise price of IDR2,100/share.
•In addition, SBI’s Tuban plant (it has a 3mn tonne per annum of clinker production capacity) will undertake a capital investment to increase the shipping capacity, such as the construction of new jetty and silos, and export 1mn tonnes of cement annually (of which 500,000 tonnes will be exported to Taheiyo’s subsidiary in the United States).
•According to the agreement, Taheiyo’s objective from this transaction is expand its businesses outside of Japan and shift its focus to Asian market for more sustainable business development. The cement demand in Japan is expected to continue to decline in the longer term due to shrinking population, according to Taheiyo.
What’s our take? We believe the impact of this transaction is positive as the proceeds will help deleverage SMGR’s balance sheet (lower its net gearing and interest charges too). Moreover, the partnership with Taheiyo will also guarantee an additional 1mn tonnes of export from SBI, somewhat providing a buffer in the case of continued slow domestic demand, in our view. Worth noting that SMGR currently owns 98.3% stake in SBI. For 2021E, we believe SMGR will be able to maintain its market share, albeit rising competition in East Java area, and potentially increase its selling prices for its second-tier brand too. Furthermore, we think SMGR’s EBITDA margin will remain solid this year given continued improvement in sales volume coupled with higher ASPs, albeit the expectation of higher cash costs.
Maintain BUY with an unchanged TP of IDR14,300/share. We remain comfortable with our forecasts and our 12-month TP of IDR14,300/share, which is based on 9.0x 2021E EV/EBITDA. The stock is currently trading at 8.1x 2021E EV/EBITDA, or at 1SD below its 10 year mean. Risks to our call: lower-than-expected demand, continued rising commodity prices, and weaker-than-expected GDP growth.