Indospring, Springing With The Growing Market

Commercial vehicle sales on track
Commercial vehicle sales jumped 22% y-o-y in the first five months of the year compared to the same period the last year. Over the longer term, commercial vehicle sales have been growing at a 9% CAGR since 2005. Assuming that the average age of commercial vehicles is five years, the population has over the same 5-year period grown by a 5% CAGR. Meanwhile, passenger car sales and the Indonesian population also grew by a 9% CAGR and 10% CAGR respectively in the last six years.

Considering the heightening activities in the plantation, mining and infrastructure sectors as well as the incoming new investments from car makers, we expect the auto market to keep growing. The growing vehicle market will spur domestic demand for the spring OEM and replacement markets. Based on our forecast, Indospring (INDS) will reach 90% utilization of its production capacity next year and full capacity the following year. It already recorded 75% utilization in its annualized 1Q12 period. Hence, the company will need to beef up capacity further next year to cope up with the strong demand.

Preparing for further expansion
The management has plans for the next phase of expansion, with the machinery purchasing list to be finalized by the end of next month. The expansion will ramp up production capacity by 20% to 9,000 tonnes of leaf springs/month at an initial estimated capital expenditure of around IDR200bn. The good thing is that the company has set aside ample space for its third plant, and it would not need to construct another new building. The expansion is expected to be complete sometime in the middle of next year.

Satisfying yield on cash dividend
The company recently announced a dividend of IDR160/share, or IDR36bn in total, implying a 3% yield (on announcement date, pre stock bonus) and 30% DPR. The dividend is in line with our expectation.

Adjustment on stock bonus
Besides cash dividend, the company also announced a two-for-five bonus issue. While this does not affect the value of the company, we view it as a positive move to increase the stock’s liquidity.

Valuation
We maintain our BUY recommendation and adjust our TP to IDR6,200/share to reflect the outstanding new shares. The new TP is at the same 13.8x FY12 PER as the pre-adjustment figure. The counter is currently trading at 8.5x FY12 PER.