Lower-than-expected performance. SMGR posted revenue of IDR 10.6 trillion in 3Q23 (+31.3% QoQ, +7.4% YoY) with a cumulative 9M23 revenue of IDR 27.7 trillion (+4.0% YoY), slightly below our estimate (SSI: 73.2%) and consensus (71.1 %). The company's sales volume spiked in 3Q23 thanks to the demand for bulk cement from IKN, which helped offset the decline in ASP (-3.7% QoQ, -9.5% YoY to IDR 887k/ton). Regarding its margins, SMGR posted a GPM of 28.4% in 3Q23 (vs. 3Q22: 31.4%); the decline was mainly caused by the increase in contribution from export products to the company's total sales volume to 15.9% (+60bps QoQ, +680bps YoY), which affected the company's blended ASP. On its bottom line, SMGR posted a net profit of IDR 848 billion in 3Q23 (+178.6% QoQ, +0.6% YoY) with a cumulative 9M23 net profit of IDR 1.7 trillion (+1.8% YoY), below our estimate ( 61.4%) and consensus (62.6%).

Market leader in IKN. SMGR has secured a deal to supply bulk cement to IKN in Kalimantan; SMGR will supply ~71% of IKN’s total cement needs (500k tons), and by the end of 9M23, SMGR had delivered 80% of that figure. To note, IKN needs around 700k tons of bulk cement for infrastructure development in FY23, and it is projected that the figure will increase to 1.2-1.3 million tons in FY24F, and IKN authorities have asked several cement companies in Indonesia to supply the need. We are optimistic that SMGR will supply 80% of IKN’s bulk cement needs next year, with volume growth of +10% YoY.

FY23F and FY24F guidances. SMGR stated that it recorded sales volume growth of +4-6% YoY in Oct-23, in line with our FY23F projection, with an estimated full-year sales volume of 36.1 million tons (+3.5% YoY), driven mainly by bulk cement (projected sales volume growth: +15 % YoY). The company also mentioned a downward revision to its ASP growth projection to +1.5% YoY (from +3.7%) YoY due to the increase in contribution from bulk cement, with a price gap of IDR 180k/ton (vs 2019: IDR 100k/ton). However, we are optimistic that positive sentiments from the government’s infrastructure budget (which is raised by +5.8% YoY to IDR 422.7 trillion for 2024) and demand for bulk cement from IKN will help support SMGR’s performance, prompting us to project the company to book a net profit of IDR 2.6 trillion (+8.8 % YoY) in FY23F.

BUY with TP of IDR 7,925 (17.3x FY24F P/E). Considering SMGR's solid future prospect, supported by demand from IKN, we decided to maintain our BUY rating on SMGR with a TP of IDR 7,925/share reflecting 17.3x P/E FY24F as we roll over our valuation to FY24F. Risks: 1) lower-than-expected demand for cement, 2) higher coal and logistics prices.