CLSA Asia Pacific Markets downgraded PT Holcim Indonesia Tbk to 'underperform' from 'outperform', saying the company's margins and earnings will be eroded after it agreed to a higher royalty payout.
"We were surprised by Holcim Indonesia's announcement to increase the royalty to its parent to 5% of sales from 1.7% previously. This isn't the first time for the cement company and it is also much higher than that for sister companies," analysts Sarina Lesmina and Edward Tanuwijaya said in a note on Wednesday.
"It is unlikely that Holcim can pass on the exorbitant increase. As a small player, it lacks significant presence. We cut our earnings (forecast) by 10-14 percent. Holcim is more expensive than Indocement, with the lowest EPS growth and ROE vs peers."
The cement maker's new royalty agreement with its parent will be implemented in two stages, 4 percent this year and 5 percent 2014 onwards. In 2008, the royalty was increased to 1.7 from 1 percent following the adoption of the Holcim brand.
"Holcim Indonesia now effectively pays much higher royalty that its sister companies. ACC and Ambuja Cements in India saw a royalty increase to 1 percent recently from 0.6-0.7 percent; both pay technical assistance fee as they do not use the Holcim brand."
Holcim Phils and Siam City Cement pay about 2 percent currently. Holcim did not provide comments, but Indonesia being a lucrative market for the group may be the reason for the higher royalty, the analysts said.
CLSA also slashed its target price for the company's shares to 2,900 rupiah from 3,600 rupiah, after the share price dropped 28.3 percent to 2,600 rupiah from 3,625 rupiah last week.
At 12.20 am (0520 GMT), shares of Holcim Indonesia were down 8.62 percent at 2,650 rupiah. The broader index was up 0.73 percent.
1221 (0521 GMT) (Reporting by Andjarsari Paramaditha, Editing by Anupama Dwivedi)