Selamat Sempurna Margins Looking Better

Satisfactory bottom-line, flat top-line
Selamat Sempurna (SMSM)’s 1H12 net income of IDR112bn (+13% y-o-y, +33% q-o-q) was in line with expectations, and comprising 48% of our forecast. The top-line numbers, though, were a rather flat IDR893bn (+2% y-o-y and +10% q-o-q), making up only 44% of our forecast. On a q-o-q basis, revenue indicated a regular and seasonally stronger 2Q.

We expect 3Q to be slightly weaker due to the Lebaran holiday, and 4Q to post the strongest results within the financial year. SMSM’s exports to the American continent declined 15% y-o-y, mainly due to the demand for radiators. An uptrend in domestic sales, however, offset the effect and resulted in flat overall growth.

Better margins
On the bright side, the 18.2% operating margin was a 1.3% improvement from the previous quarter, bringing the first six months’ margin to 17.6%, which is better than the FY12 estimate of 15.8%, even if we are to factor in higher expenditures expected in 4Q. The improvement in gross margins was partly due to the appreciation of the USD, lower raw material prices and higher operational efficiency.

Volumes slightly below
Volume-wise, filter sales fell slightly below our estimates, at 28.2m units, and comprising 45% of our FY12f numbers. Radiator sales only reached 376k units, or 41% of FY12f, although it has begun to pick up by 16% on a q-o-q basis.

Consolidating Hydaxle
SMSM recently purchased 2% of Hydraxle for IDR9.4bn, raising its stake in the company to 51%. This investment will require SMSM to consolidate Hydraxle in the future although this would not make a significant impact on its bottom-line. Hydraxle’s performance in 1H12 was satisfactory, with net income jumping 22% q-o-q to IDR23bn, or 71% of our estimates for FY12.

Payout Day
SMSM just announced that it will distribute IDR72bn, or IDR50/share (64% payout ratio; 2.4% interim dividend yield), from its 1H12 net income as an interim dividend. The dividend will be paid on 21 Sept 2012. We reiterate our view that SMSM is an interesting dividend play with an estimated yield of 6.3% based on FY12 earnings.

Maintain BUY
We maintain forecast and our BUY recommendation as well as our TP of IDR2,250, which implies 14.0x-12.0x earnings for FY12-FY13. The counter is currently trading at 12.7x-10.9x FY12-FY13 earnings.