Selamat Sempurna, a Steady Dividend Stock

High dividend yield
SMSM’s high dividend payout ratio (DPR) of 91% for 2010 earnings – it has a policy of maintaining a minimum DPR of 45% if net income exceeds IDR30bn – makes the stock one of the best dividend plays, in view of its 7.4% dividend yield at the current price on 2010 earnings. We expect the dividend yield to reach 8.1% for 2011 vs the average of 2.7% for other dividend paying stocks on the Jakarta Stock Exchange.

Stable top-line growth
Sales have always been increasing annually in the last 18 years, with a CAGR of 13% achieved in the last five years and we believe this will be the normal CAGR for the next three years. Growth will be supported by revenue streams from new overseas markets as well as rising domestic demand. Some 95% of SMSM’s sales stem from the replacement market, which is naturally quite resilient.

Steady margin, high profits
SMSM is adept at maintaining margins even amid volatile raw material prices. In the last five years, its gross margin has ranged from 22%-24%, thereby giving rise to a net income CAGR of 18%. We see stable margins of around 24% within the next three years, which will translate into a net income CAGR of 20%. The steady margin will be fuelled by solid inventory management and cost reduction measures, which helped lift the ROE gradually from 15.4% in FY06 to 30.5% in 1H11. We expect the ROE to improve to 36.3% in 2013 from 29.6% in 2010, owing by higher utilization.

Ample room to grow even with low capex
SMSM increased its radiator and de-bottlenecked filter production capacity in the last two years by 33% and 63% respectively. As a result, its current utilized production capacity is only 48% for radiators and 56% for filters. Hence, we believe that the company does not need to spend significant capex in the short term to support growth.

Risk factors
The main business risks that can potentially affect SMSM are: (i) raw material supply shortages, (ii) extreme movements in raw material prices, and (iii) foreign currency fluctuations.