Semen Baturaja Tbk Follow up

Five months ago, I discussed how overpriced Semen Baturaja Tbk was with its P/E at 67x at that point (see this post). Since then, its share price rose another 70%. Either I’m stupid or the market insanity has gone even higher.

Semen Baturaja - Share Price - 2017-03-30.PNG

Source: Google Finance

Semen Baturaja’s 16Q3 revenue was flat yoy but its earnings dropped 25% yoy. With falling earnings and rising share price, the P/E multiple has reached 126x now!

This is not a technology stock that can scale easily and quickly, has long term growth prospect or network effect or in winner-takes-all market. This is a cement industry that is cyclical in nature, capital intensive, has no differentiated products as cement is just a commodity, and has reached overcapacity by more than 30%.

The three largest cement producers in Indonesia are reporting falling margin over the past 3 years. Baturaja is no exception. Baturaja’s planned capacity is scheduled to be nearly doubled by end of 2017, but with the market at overcapacity for now and foreseeable future, Baturaja will continue to face margin pressure.

Even if Baturaja’s earnings quadrupled next year in the most optimistic case, its P/E will still be at 32x. That’s nearly 2x the P/E of Indocement, which is the most efficient (low cost) producer in the industry. Current valuation certainly does not make any sense, and the insanity is getting out of hand. When the correction occurs, be prepared if the price falls by 70% in a short time.

Semen Baturaja - Share Price - 2016 to 2017-03-30.PNG

Source: Google Finance

The share price is up 10x over the past 15 months! Indonesia stock market does not allow short selling. There are ways to short it by arranging derivatives with other parties but it involves high cost, so many funds will shun away from shorting. If short selling were allowed, I’m sure Baturaja will be highly shorted. That could have prevented its price to reach this level.

Only when the tide goes out do you discover who’s been swimming naked – Warren Buffett

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