1Q23 review. INTP booked revenue of IDR 4.2tn in 1Q23 (-9.0% qoq, +19.3% yoy) with a domestic sales volume of 3.9mn tons (-0.9% qoq, +3.6% yoy); the company’s top line performance was in line with our estimate and consensus (SSI: 24.9%, Cons: 24.5%), supported by the increase in blended ASP (+13.2% yoy to IDR 961k/ton), though the figure was lower than 4Q22 (-9.9% qoq). Meanwhile, SMGR posted sales of ID 8.9tn (-19.5% qoq, +4.5%); the decline in sales was mainly caused by the drop in domestic sales volume to 6.7mn tons (-12.4% qoq, -0.8% yoy) and domestic ASP to IDR 910k/ton (-8.3% qoq, +5.8% yoy). SMGR’s top-line performance was slightly below ours and cons (SSI: 23.1%, Cons: 23.0%). The deceleration in SMGR and INTP’s sales volume growth was mainly caused by the high-base effect in 1Q22 and the longer Ramadhan holiday in 1Q23. Despite the somewhat unremarkable performance, both SMGR and INTP managed to increase their market share in 1Q23; INTP posted 27.7% (vs. 4Q22: 24.0%, 1Q22: 25.0%) while SMGR booked 48.8% (vs. 4Q22: 46.8%, 1Q22: 48.0%). *Note: SMBR’s sales volume was not included in our market share calculation
Costs remain elevated even with DMO. Both SMGR and INTP already secured DMO coal supply through Apr-23; however, their total COGS remain elevated in 1Q23, due to the spike in overhead costs and the impact of fuel hikes in 3Q22 and 4Q22 (though fuel prices already normalized in 1Q23 and we expect no significant hikes throughout the rest of the year). INTP’s total COGS went up +0.1% qoq, +14.3% yoy, with its overhead cost rising +17.4% qoq, +32.9% yoy, partly due to the Bosowa Maros plant (the plant ran at a 50% capacity in 1Q23, since it only utilized one of its two clinker production lines; it plans to utilize the second production line in June 2023). Overall, the increase in costs brought INTP’s total cost/ton to IDR 752k/ton (+0.9% qoq, +12.4% yoy). Meanwhile, SMGR’s total cost/ton was recorded at IDR 870k/ton (-12.5% qoq, +6.8% yoy), mainly due to higher distribution expenses and fuel hikes.
Optimism for 2H23. If we take a look at historical data, cement sales volume in 1H is usually lower than in 2H due to the rainy season and the Ramadan holiday. Since 2018, domestic 1Q and 2Q sales only contributed 20-23% of the full-year volume, and sales usually picked up in 3Q with an average sales volume increase of +30.4% (see figure 4). In addition, we see another potential catalyst for cement sales, the election (which will be held in 1Q24), which should help boost demand and purchasing power, especially in the retail market (bagged cement). However, we believe that bulk cement (1Q23: +6.0% yoy) will remain the main driver of the Indonesian cement industry in 2H23, especially with the potential demand from the IKN project in Kalimantan.
Neutral rating. We reiterate our NEUTRAL rating for the cement sector; we expect to see better sales volume in 2H23, especially with the potential for huge demand from projects outside Java. We have BUY recommendations on SMGR (TP: IDR 9,800; -0.75x 5-year PER average) and INTP (TP: IDR 12,200; -0.70x 5-year PER average). Main risks: declining demand for cement and higher distribution expenses.