Selamat Sempurna A Steady Dividend Payer

KEY HIGHLIGHTS

High dividend yield
SMSM’s high dividend payout ratio of 91% for 2010 earnings (its policy is to pay a minimum 45% DPR if its net income exceeds IDR30bn) makes the stock one of the best dividend payers. We expect its dividend yield to reach 7.0% for 2012 versus the average of 2.4% among other dividend paying stocks in the Jakarta Stock Exchange.

Stable and moderate growth
Sales have been on incremental growth every year for the last 18 years, chalking up a CAGR of 13% in the last six years. This we believe would be the company’s normal growth rate for the next three years. Growth will be supported by penetration of new overseas markets and increasing domestic demand. Some 95% of SMSM’s sales are to the replacement market, which is quite resilient in nature.

Strong profitability
SMSM is adept at maintaining margins even amid raw material price fluctuations. In 2005-2010, its gross margin had ranged from 22%-24% with improvement to 26% in 2011, giving rise to a net income CAGR of 20%. We expect stable margins of ~24% within the next three years, which will translate into a net income CAGR of 15%. The steady margin will be driven by solid inventory management and cost reduction measures, which have gradually lifted ROE from 15.4% in FY06 to 35.7% in FY11. We expect ROE to reach 36.3% in FY13

Ample room to grow even with low capex
SMSM increased its radiator and de-bottlenecked filter production capacity by 33% and 63% respectively in the last two year. As a result, its utilized production capacity is only 45% for radiators and 60% for filters. This leads us to believe that the company does not need to spend high capex in the short term to support growth.

Risk
The main business risks are: i) raw materials supply, ii) extreme movements in raw material prices, and iii) fluctuations in foreign currency

COMPANY REPORT CARD

ROE
The company boasts of stable margins, a high dividend payout and high ROEs. We expect ROEs of 34.7% and 36.3% for FY12 and FY13 respectively.

Management
The company’s board of commissioners is led by Johan Kurniawan while its board of directors is helmed by Eddy Hartono. Both are the founding members of the company.

Dividend
SMSM has been adopting a dividend payout ratio of above 90% since 2008. However, we expect this ratio to soften to 80% in 2011 and 2012, which puts the 2012 based dividend yield at 7.0%.

RECOMMENDATION

We have a BUY recommendation on SMSM, based on i) its high dividend yield; ii) high profitability; and iii) stable revenue growth prospects. Our target price of IDR2,050 implies a 13.1x-11.5x PE on FY12-FY13 earnings. The counter is currently trading at 11.4x-10.0x FY12-FY13 earnings.