Isnaputra Iskandar upgrades recommendation to BUY (prior: HOLD) on Semen Indonesia (SMGR), and raising TP to IDR12,400 from IDR10,100 per shares. New TP is based on Discounted Cash Flow (DFC) methodology, using WACC 8.9%, and LTG: 5%.
Isnaputra comments on acquisition Holcim Indonesia (SMCB) by SMGR. He views the deal will be positive for both industry and SMGR.
SMGR acquired an 80% stake in SMCB (Not Rated, IDR1,905) for an EV of USD1.75b (100% basis), which suggests an equivalent share price of c.IDR2,250. The implied EV/capacity of USD117/t looks fair and is in line with SMGR’s USD115/t.
Isnaputra sees a tender offer will likely follow given the change of control at SMCB. SMGR has secured funding from foreign and local banks for the acquisition.
Isnaputra views the deal is positive for industry consolidation and will strengthen the company’s position in key domestic markets.
Post the deal, he forecasts SMCB’s earnings to improve due to 1) the absence of royalty fees, 2) lower financing cost and 3) synergies created with SMGR. He has not factored in potential synergies in his analysis. He estimates his 2019 earnings forecast would increase by 1.9% for every 0.5% increase in SMCB’s EBITDA margin.
Isnaputra factor in earnings from SMCB in his FY19E forecast which falls by 11.1% on the back of higher interest expense. Based on his estimates, the higher interest expense could be covered by a c.2% EBITDA margin improvement, which he thinks SMGR can achieve through cost efficiencies and raising prices. However, For FY20E, he raises his earnings forecast assuming a stronger IDR, a better industry outlook, lower coal prices and higher earnings contribution from SMCB.
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