Selamat Sempurna Hydraxle Comes on Board

Acquiring a growing and profitable company…
We value positively SMSM’s acquisition of 49% in its sister company Hydraxle Perkasa (HP) last month. HP, which mainly produces dump body and hoists, is the market leader with a 20%-30% share in this growing fragmented market, whose demand is driven by the domestic mining and plantation sectors, and infrastructure activities.

Its strength lies in the fact that since HP is the only domestic company that makes the hoist all by itself, it has product customization flexibility and is able to guarantee uniformity product quality, which places it as the price leader. The numbers are comforting as sales and net profit have been growing by 42% and 67% CAGRs respectively in the last five years, with last year’s ROE at 21%.

…with an interesting expansion plan…
The company aims to double its production capacity to 10,000 trucks/year in two years. After completing its expansion plan, management intends to aggressively enlarge its market share, which we think is possible since HP currently only focuses on mid-sized trucks with the small-mid mining industry as the major buyers.

Hence it has not effectively capitalized on the potential of the market for small-sized trucks in the plantation sector. HP is also in the process of increasing production efficiency, which is now bearing fruit, judging from the 2% gross margin expansion in 2011.

…at a discount
Our DCF-based valuation using 12.4% WACC and 3% terminal growth suggest a fair value of IDR366bn for Hydraxle (IDR188bn for 49%), or 11.8x FY12 earnings. SMSM’s acquisition was priced at IDR113bn (for 49% interest), or 7.1x FY12 earnings, which we think is a bargain for the 40% discount.

As SMSM is servicing a 7% long term bank loan with Mizuho, we expect the HP acquisition to contribute 2%-3%-4% to SMSM’s FY12-FY13-FY14 pre-tax income (after deducting equity income from its acquisition loan cost). We also welcome the acquisition because it reaffirms management’s determination to once again capitalize on inorganic opportunities following plans for the Tokyo Radiator Manufacturing JV.

Still a dividend play
SMSM distributed a IDR100/share final dividend for FY11 (including IDR50/share as interim dividend), implying 5.3% yield at the current price. The DPR of 73% for FY11 was within our expectation of a lower DPR for that year. We keep our assumption of a IDR129/share dividend forecast for FY12, which implies a 6.8% yield.

Forecast adjustment
Besides incorporating Hydraxle, we also adjust our USD-IDR assumption, which increases the export revenue nominal value. We also moderate our volume growth, which all in increases our new FY12-FY13-FY14 revenue and net income forecasts by 1%-2%-3% and 3%-5%-7% respectively.

Valuation
We maintain our BUY call and raise our TP to IDR2,250, implying 14.0x-12.0x PE on FY12-FY13 earnings. The counter is currently trading at 11.8x-10.1x FY12-FY13 PE.