Indonesia Cement: Weaker but expected m-m Dec volume; recovery in 2021 is imminent

Domestic cement sales for December 2020 saw a 6% m-m volume decline and resulted in FY20 volume declining by 10.4% y-y to 62.7mn tonnes, dragged by volume weakness in Java area (-13.2% y-y), only a mere 1% higher than our forecast. Indocement (INTP IJ) posted only a 0.6% m-m volume decline in December 2020, translating into a slight increase in its market share. The soft December volume was mainly due to lesser working days amidst the holiday season and slight tightening on PSBB, as well as a high base comparison with December last year, in our view. We believe volume recovery in 2021 is imminent, with the potential improving GDP growth and positive progress on vaccines. Maintain our OVERWEIGHT stance on the sector.

Key highlights of December 2020 volume performance:

·         Java volume saw a 12.2% y-y and 3.9% m-m decline in Dec 2020, bringing the FY20 Java volume to 34mn tonnes (-13.2% y-y). Western Java was the main volume drag in Dec 2020 as it booked a 5.3% m-m drop in volume vis-à-vis 2.5% m-m decline in Eastern area.

·         Sumatera, the second largest region for cement demand, saw a volume decline of 5.0% m-m to 1.3mn tonnes (-1.1% y-y) in December 2020.

·         The overall bag and bulk volumes saw a 4.8% m-m and 10.0%

·         m-m volume decline, respectively. This was aligned with the slower construction activities in the last month of the year.

·         INTP’s market share was slightly up to 26% in Dec 20, and also up to 25.8% in FY20 compared to 25.5% in 2019.

·         INTP’s average selling price was unchanged in Dec 2020; Going forward into 2021, we think there’s more room for ASP increases, assuming a continued rise in energy costs and robust demand recovery materializes.

The era of recovery in 2021; maintain OVERWEIGHT. While we believe the recovery on volume is somewhat imminent given the gradual improvement in the economy, we think there is upside risk on potential further increase in ASPs this year given the continued rising commodity price and the return of bag demand amidst improving consumption. We remain comfortable with our forecast of 7-8% y-y volume growth and 2% ASP increase for 2021, and still expect EBITDA performance to recover given improving operating leverage and factory utilization rates too. The sector is trading at 11.1x 2021E EV/EBITDA, or 1SD below its five-year mean. We maintain our BUY calls on INTP and SMGR, but HOLD on SMBR. The key downside risks to our sector call would be longer-than-expected COVID-19 issues, weaker-than-expected IDR, and lesser-than-expected ASP increases.