Introduction

The Indonesian cement industry is currently navigating a subdued demand environment, characterized by oversupply and price pressures. Leading companies in the sector, including Indocement (INTP), Semen Indonesia (SMGR), and Semen Baturaja (SMBR), have adopted various strategies to maintain market share, improve operational efficiency, and address environmental sustainability. This report re-initiates coverage on Indocement and provides insights into its competitive positioning, financial performance, and strategic initiatives. It also examines other key players in the industry to offer a comprehensive view of the market landscape.

Indocement (INTP): In a Sweet Spot

Recommendation: BUY

Indocement Tunggal Prakarsa (INTP) is Indonesia’s second-largest cement producer, boasting a 24.6% market share as of 2022. The company operates the largest cement plant in Citeureup, West Java, with a total capacity of 18.1 million tonnes (mt). Indocement has strategically positioned its plants to efficiently serve key markets, including Java, Sumatra, and Eastern Indonesia.

Efficient Operations in Challenging Times

Amid a challenging demand environment, INTP has leveraged its concentrated plant locations to optimize operational efficiency. This strategic setup has enabled the company to maintain robust EBITDA margins of approximately 20%, outperforming its peers like Semen Indonesia (SMGR). During 2020-23, despite higher energy costs and lack of access to Domestic Market Obligation (DMO) coal, INTP managed to sustain competitive margins due to its cost-efficient operations.

Regaining Market Share

INTP’s market share has grown from 25.9% in FY19 to 29.6% in FY24E, driven primarily by inorganic growth through the acquisition of the Grobogan plant and leases of Bosowa facilities. Excluding these additions, the company’s market share remains resilient at 25%, a testament to its strong brand positioning and efficient product management. Notably, INTP has deployed fewer “fighting brands” compared to SMGR, focusing instead on its flagship premium brand, “Tiga Roda.”

Leader in Alternative Fuel Usage

INTP is a pioneer in alternative fuel usage in Indonesia, achieving a 21% alternative fuel mix in 9M24 compared to SMGR’s 7%. The company aims to increase this to 42% by FY30E. Investments in Refuse-Derived Fuel (RDF) systems at the Grobogan plant and other facilities are expected to yield significant cost savings, improving EBITDA margins by 1% for every 10% increase in alternative fuel usage.

Strategic Acquisitions and Leases

INTP’s acquisition of the Grobogan plant has expanded its footprint in Central Java and Western East Java, reducing logistics costs and improving market reach. The company has also leased two facilities from Bosowa, with a combined capacity of 5.3mt, contributing 14-16% of its total production volume. These strategic moves underline INTP’s commitment to enhancing operational flexibility and market presence.

Valuation and Target Price

INTP’s valuation metrics reflect its strong fundamentals and growth potential. The company has been re-initiated with a BUY rating and a target price (TP) of IDR7,200, implying a 21% upside from its current price. The TP is based on a combination of valuation methodologies, including DCF, EV/Capacity, and EV/EBITDA.

Semen Indonesia (SMGR): Industry Leader Facing Challenges

Recommendation: HOLD

Semen Indonesia (SMGR) is the largest cement producer in Indonesia, with a market share of 46.2% in FY24E, down from 53.0% in FY19. The company operates an extensive network of plants across the country but faces challenges in maintaining profitability due to oversupply and price pressures.

Operational Struggles

SMGR’s extensive plant network incurs higher maintenance and operational costs, putting pressure on margins. The company has also relied heavily on “fighting brands,” which now contribute 25% of its total bag volume, compared to INTP’s 20%. This strategy highlights the competitive pressures SMGR faces in defending its market share.

Limited Adoption of Alternative Fuels

SMGR lags behind INTP in adopting alternative fuels, with a mix of only 7% in 9M24. This limits its ability to achieve significant cost savings and improve margins in the current high-energy-cost environment.

Recommendation

Given the challenges and limited margin expansion potential, SMGR is rated as a HOLD with a target price of IDR2,900.

Semen Baturaja (SMBR): Small Player in a Competitive Market

Recommendation: Not Rated

Semen Baturaja (SMBR) is a smaller player in the Indonesian cement market, primarily serving the South Sumatra region. The company faces significant challenges due to the highly competitive landscape and limited economies of scale.

Operational Constraints

SMBR’s smaller scale of operations limits its ability to compete effectively with larger players like INTP and SMGR. The company’s financial metrics and market share data were not detailed in the report, reflecting its limited impact on the broader industry dynamics.

Recommendation

SMBR is not rated in this report, given its relatively minor role in the industry.

Conclusion

The Indonesian cement industry is marked by intense competition, price pressures, and evolving market dynamics. Indocement (INTP) stands out as a resilient player with strong operational efficiency, strategic acquisitions, and a commitment to sustainability through alternative fuel adoption. Its BUY recommendation and target price of IDR7,200 reflect its robust growth prospects. In contrast, Semen Indonesia (SMGR) faces challenges in maintaining profitability and market share, leading to a HOLD recommendation. Semen Baturaja (SMBR), as a smaller player, remains unrated but highlights the competitive pressures in the industry. Investors are advised to consider these dynamics when evaluating opportunities in the Indonesian cement sector.