Selamat Sempurna (SMSM IJ; BUY; TP IDR 2,050): Initiation of coverage - A Steady Dividend Stock

We initiate coverage on Selamat Sempurna (SMSM) with a BUY recommendation, based on: i) its high dividend yield; ii) high profitability; and iii) stable revenue growth prospects. We expect ROE to improve to 36.3% in 2013 from 29.6% in 2010, fuelled by higher utilization, and the stock’s dividend yield to jump to 10.7% from 7.1%. Our target price of IDR2,050 implies a 13.1x-11.5x PE on FY12-FY13 earnings. The counter is currently trading at 8.5x-7.5x FY12-FY13 earnings.

High dividend yield. SMSM’s high dividend payout ratio of 91% for 2010 earnings (its policy is a minimum 45% DPR if net income exceeds IDR30bn) makes the stock one of the best dividend payers, with a 7.1% dividend yield for 2010 earnings at the current price. We expect dividend yield to reach 7.9% for 2011 versus the average of 2.6% among other dividend paying stocks in the Jakarta Stock Exchange.

Stable topline growth. Sales have always been increasing every year in the last 18 years, with a CAGR of 13% in the last five years, which we believe would be the normal growth rate for the next three years. Growth will be supported by the penetration of new markets overseas and increasing domestic demand. Some 95% of SMSM’s sales are to the replacement market, which is naturally quite resilient.

Steady margin; high profitability. SMSM is good at maintaining margin even amid raw material price fluctuations. In the last five years, its gross margin has ranged from 22%-24%, which gave rise to a net income CAGR of 18%. We see stable margins of ~24% within the next three years, which will translate into a net income CAGR of 20%. The steady margin will be driven by solid inventory management and cost reduction measures, which in turn gradually lifted ROE from 15.4% in FY06 to 30.5% in 1H11. We expect ROE to reach 36.3% in FY13.

Ample room to grow even at low capex. SMSM increased its radiator and de-bottlenecked filter production capacity in the last two years to ramp up capacity 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 high capex in the short term to support growth.

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

Source: OSK Nusadana dated 21 September 2011