Selamat Sempurna Plant Visit Notes (2011)
Summary:
We visited SMSM’s Bitung – Tangerang plant which produces filters and found the plant to be neat and well organized. We reiterate our positive view on SMSM considering its 1) high profitability; 2) high dividend yield; and 3) stable growth in export and local market. We maintain our forecast and BUY recommendation with TP at IDR2,050 which implies 13.1x FY12 earnings. The counter is currently trading at 10.7x FY12 earnings
Walking through the plant.
We visited SMSM’s Bitung – Tangerang plant which produces filters. It is one of three SMSM plants, the others are Kapuk radiator plant and Tangerang other product plant (muffler, brake pipe, and gasket). The 3-4ha sized plant is neat and well organized with good air circulation and green environment which really conducive for the working process. It is the kitchen behind SMSM’s hallmark as filters and radiators producer with widest product arrays (of more than 5,000 variants) in the region.
The plant manager with 18 years working experience in SMSM explained that the most important factors in adapting lean production system are to set the culture and manages the peoples.
We also saw several example of the cost reduction program, one main factors behind SMSM stable margin (~23-24% in the last five years), such as the usage of gravitational conveyor line which replaced elevator function and raw material usage setting which yield in lower waste. The program is quite successful with high worker participation as SMSM generously give direct compensation to its worker which idea being implemented.
In addition, while coincidentally there was a mass labor strike in nearby area to protest the minimum wage policy; SMSM’s production activity wasn’t affected as it has good relationship with the labor. Simply said, my colleagues saw the production director give a birthday wish to one of the blue collar worker while we were walking around the plant.
Dividend play
Management reiterates their eagerness to keep high dividend paying policy. In the last three years, the company paid more than 90% of its earnings for dividend. We expect a high 6.7% and 8.0% dividend yield for FY11 and FY12 based earnings. The high dividend payout also keep SMSM profitability in high level with trailing ROE reached 35% in the last quarter.
Sales volumes target confirming our expectation
Management expects sales volume to be at 65m filters and 1-1.1m radiators in FY12, growing ~11% from the FY11 expectation at 59m filters and 900k radiators. In addition, as media reported, management said that they expect FY12 top line to be around IDR2.0bn, 11.1% growth from FY11 revenue expectation at IDR1.8bn. The figures are in line with our FY11 and FY12 sales volumes and value expectations. Notes that SMSM current capacities are 96m filters and 1.95m radiators. Hence the company still has great ample room for production growth without the needs of major additional capex.
Quality product with a discount
SMSM products are internationally acknowledged with export to more than 100 countries. To penetrate the export market, SMSM positioned itself as a quality product with a discount which fills the market between premium and medium brands. Technically, SMSM product’s prices are 20-25% below Japanese premium brands, but the technical specification is only 5% below these brands.
New joint venture
In the last week, SMSM disclosed that it will create a joint venture with Tokyo Radiator Manufacturing which will be located in Tangerang. The JV activity will be in manufacturing and trading of heat exchanger (radiator) of OEM brand to serve domestic automotive needs of Isuzu and Nissan. The plant initial capacity is at 80k unit radiator per year which is planned to start operation in mid 2013. SMSM will have 33% contribution from total invested capital of IDR17.2bn. From Tokyo Radiator Manufacturing release, it is stated that total investment is at IDR24.7bn and FY13 revenue forecast for the JV is at JPY1bn (~IDR116bn).
With minimal information disclosed, we still haven’t included the impact of the JV on our forecast. However, rough estimation using assumption of: 1) 2013 revenue of IDR 116bn; 2) operating margin of 15.6% (our FY11 estimates for SMSM; considering the JV will serve OEM, the margin may be lower); 3) interest expense of IDR787m (10.5% average cost of debt, IDR7.5bn debt), and 4) 25% tax rate; will yield on IDR13.8bn. SMSM portion will be around IDR4.6bn or only ~2% of our FY13 net income forecast.
However we take this news positively as it is adding prove that SMSM quality is competitive at OEM level. It is also an initial sign of SMSM being benefitted by growing domestic automotive market. As currently many auto manufacturer plan to expand in Indonesia, the needs of high qualified spare parts manufacturer will also increase.
Maintain BUY
We maintain our forecast and BUY recommendation with TP at IDR2,050 which implies 13.1x FY12 earnings. The counter is currently trading at 10.7x FY12 earnings, around the same with industry peers at 10.3x. However SMSM has superior profitability and dividend yield of 35% ROE and 8% yield compared to average peers ROE at 22% and yield at 4.1%.
