Positive Synergy with Taiheiyo Cement Corp.
Taiheiyo Cement Corporation (TCC) plans to purchase at least 15% of SMCB shares, a subsidiary of SMGR. in addition, TCC has committed to purchasing at least 1 million tonnes of cement and clinker products every year, equivalent to 8.1% of SMCB’s sales volume in FY19, or 2.3% of SMGR’s consolidated sales volume in the same period. The synergy between the two companies will be mutually beneficial amid the ongoing deleveraging program to improve the company’s financial structure. We recommend BUY for SMGR with a TP of IDR 13,050, reflecting 10.5x FY21F EV/EBITDA.
Positive synergy with TCC; USD 220 million fund injection. Taiheiyo Cement Corporation (TCC) will purchase part of the ownership of SMCB (a subsidiary of SMGR) through a right issue scheme in July 2021. With an investment of USD 220 million, TCC plans to purchase at least 15% of SMCB’s total outstanding shares. TCC has experience operating 17 cement plants in the Pacific (Japan, China, US, Vietnam, and the Philippines). Therefore, the synergy between the two parties will benefit SMGR, especially in the development of its cement business outside Indonesia.
Tuban plant expansion and commitment to export 1 million tonnes of cement. SMGR and TCC are working together to develop SMGR’s clinker plant in Tuban by adding new silo and jetty. The plant currently has a production capacity of 3 million tonnes/year. In addition, SMGR also benefits from TCC’s commitment to market at least 1 million tonnes of SMGR’s cement and clinker products every year, equivalent to 8.1% of SMCB’s FY19 sales volume or 2.3% of SMGR’s consolidated sales volume in the same period (6.7% of SMCB’s total production capacity and 2.0% of SMGR’s national production capacity). Of the amount, 500 thousand tonnes will be allocated for export to TCC’s subsidiaries in the United States.
Transaction at premium price. In its publication, TCC said it would purchase at least 1.4 billion new shares issued by SMCB at IDR 2,300/share, with a total transaction value of IDR 3.2 trillion (USD 220 million) and a PBV of ~2.1x. The price is 33.7% higher than SMCB’s current price (IDR 1,720) and 9.7% higher than the price used by SMGR to acquire SMGR in early 2019 (IDR 2,097). The premium price indicates TCC’s confidence in SMCB and SMGR Group’s long-term growth prospect.
Valuation: BUY with a TP of IDR 13,050 (10.5x FY21F EV/EBITDA). We set a TP of IDR 13,050 (10.5x EV/EBITDA), reflecting SMGR’s average EV/EBITDA in the last five years. Main risks: Decline in sales volume and lower-than-expected selling price.