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Semen Gresik courting CIMA again?
* Indonesia’s PT Semen Gresik Tbk (Semen Gresik) is in negotiations to buy Cement Industries of Malaysia Bhd (CIMA), according a report by Reuters. While declining to name a specific acquisition target, the report quoted Semen Gresik’s President Director Dwi Soepjipto as saying that the group was looking to buy a Malaysian cement producer with an annual production capacity between two million to three million tonne.
* Semen Gresik’s interest in CIMA is not something new. Early last year, the Indonesian media had reported that Semen Gresik was lining up several cement companies as potential acquisition targets – including CIMA.
* To fund the deal, Semen Gresik has set aside circa Rp350 million (RM1.27 bil). However, the total amount to be raised could be higher depending on how large a stake it gets to buy. We understand that Semen Gresik is seeking a controlling stake in any of its potential targets. Semen Gresik would likely fund the purchase through a combination of cash and borrowings. Based on its annual report ending Dec 31, 2009, the group has about US$580 milllion cash in its kitty.
* Latest development appears to be a strategic move by Semen Gresik to: (1) Gain a deeper foothold into the Asean market; (2) Expand its existing capacity through acquisitions of brown field cement manufacturing plants to meet Indonesia’s growing cement demand – expected to rise by a stronger 9% this year against its previous forecast of 6%-7%.
* Semen Gresik is Indonesia’s largest cement maker with a 45% market share – followed by PT Indocement Tunggal Prakarsa Tbk (30%) and PT Holcim Indonesia Tbk (15%) at second and third respectively. Semen Gresik is operating close to full capacity at 19 million tonne.
* We gather that CIMA – the cement-manufacturing arm of the UEM group – has a market share of 18% in Malaysia. CIMA has two plants in Malaysia (Bukit Ketri, Perlis and Bahau,
Negri Sembilan) - with a total clinker capacity of 2.8 million tonne.
* But we reckon Semen Gresik’s strategic move for CIMA is unlikely to trigger further mergers & acquisition (M&A) activities within Malaysia’s cement industry – which has already
undergone a major round of consolidations from the mid-1990’s until the mid-2000’s.
* Post-consolidation, the Malaysian cement industry is now dominated by four players – i.e.CIMA, Lafarge Malayan Cement Bhd (Lafarge), YTL Cement Bhd (YTL Cement) and Tasek Cement Bhd (Tasek). Not unlike CIMA, the other three are integrated cement producers with healthy balance sheets – backed by a strong parent. Hence, there is no real push factor for them to sell out unless the offer is substantive, in our view.
* We maintain our NEUTRAL on the cement sector – and keep our HOLD call on Lafarge (FV=RM6.85/share). For exposure to the building materials theme, we prefer the steel sector.
