SMGR @ IDR 9,750

	SMGR (current)
Mcap	58,870
Cash	4,090
Pref.	1,538
Debt	10,288
EV	66,606
EBITDA19 cons.	6,085
EV/EBITDA19	8.89

Currently, SMGR is trading at 10.94 EV/EBITDA19.

At present, SMGR plans to acquire 80% SMCB at a price of USD 1.36bio. With the IDR 15k/USD exchange rate, this transaction is equivalent to IDR 20.4 T.

According to market consensus, SMGR will generate EBITDA of 6.09T and SMCB 1.26T in 2019.

Assumed, SMGR will borrow from a bank of IDR 20T to finance this acquisition. Assuming a loan interest of 10% p.a, the financial burden of SMGR will increase by IDR 2T/year. While the EBITDA19 SMCB portion that is entitled to SMGR is IDR 1T. So, it seems that SMCB's income is not able to finance SMGR's debt burden arising from this acquisition.

And not only that, what the market does not realize is that EV SMGR has increased sharply due to this acquisition transaction:

	SMGR post acquisition
Mcap	58,870
Cash	4,090
Pref	1,538
Debt	30,288
EV	86,606
EBITDA19	7,093
EV/EBITDA19	12.21

As a result of this acquisition, SMGR’ EV increased to IDR 86.6T.

And even though SMGR’ EBITDA19 also rose due to this acquisition, but the EV/EBITDA19 rose significantly from 8.89x to 12.21x.

In the last 10 years, which covered the boom and bust cycle of the cement industry, the average SMGR traded at 9x EV/EBITDA.

If the fair valuation of SMGR is indeed 9x EV/EBITDA, then the SMGR market cap must go down to IDR 36.10T. This means 39% downside from current price.

39% downside does look too excessive. It could be that the market consensus figure is too low.

However, even if we use the most optimistic numbers from market, namely EBITDA19 IDR 7.5T for SMGR and IDR 1.9T for SMCB, there is still a 9.22% downside from the current level.

It does not mean that the price of SMGR will actually decrease by 9.22%, but the calculation above shows that it is difficult to rejoice in the acquisition that will be carried out by SMGR.

Apart from the fairy tale regarding the cement moratorium, and also the fantasy of the synergy that resulted from this acquisition, I see that the acquisition of SMCB by SMGR is actually not needed. This will only make sense if done at a lower valuation.

Disclaimer: This article is not a recommendation to conduct transactions on the intended securities. Any consequences arising from this writing are beyond the responsibility of the author.