Initiate coverage with BUY, TP of Rp1,370
We initiate coverage on SMSM with a BUY recommendation and TP of Rp1,370, implying 12.9x- 11.7x 10F-11F PER. Our BUY call is underpinned by: 1) our confidence in the sustainability of the company’s revenues growth going forward, 2) the attractive 09-10F ROE of 25%-29% and generous dividend policy, and 3) the substantial excess capacity to accommodate further sales volume growth. In determining our target price, we used a DCF valuation with 3% terminal growth, multiple WACC ranging from between 13.7% to 13.8% and 2011 as the base year. The shares are attractive and currently trade at 9.6x-8.7x 10F-11F PER.
Revenues should continue to grow firmly
We forecast 10F-11F revenues growth of 15%-14% respectively. Note that the company has an excellent track record with 19 years of consecutive growth in revenues since 1992 – and the company even managed to book revenues growth in 2009 when global GDP contracted. Supporting the growth going forward are: 1) the enormous size of the global filter & radiator market, 2) Indonesia’s competitive cost structure which should translate into competitive pricing, 3) expectations that global GDP growth should be accompanied by brisker revenues growth following the global economic weakness in 2009, and 4) strong car sales growth in the domestic market (car sales surged 75.4% YoY in the first 7 months of the year) which should increase demand for replacement automotive filters.
Generous dividend policy
We expect a 10F-11F-12F dividend yield of 4.7%-5.2%-5.9%, respectively. Cash dividends should be paid consistently since the company’s dividend policy stipulates a minimum dividend payout ratio of 45% if the net profit is above Rp 30 bn. Note that in the last 3 years the company’s dividend payout ratios have been even higher than the minimum requirement (at 72%-94%-98% for the years of 07-08-09, respectively). Yet despite the generous dividend payout, the company has still managed to keep its debt at a conservative level (at the end of 2009, net gearing was only 31%). For 10F-11F, we forecast net gearing of 31%-17% respectively.
Excess capacity to accommodate further growth
In 2009, the utilization rate for filters, aluminum radiators and copper radiators production capacity were 55%, 84% and 24% respectively. The production of aluminum radiators has been growing very strongly (30.5% CAGR in 2005 to 2009). However, the company foresees more growth to come and has accordingly ramped up the production capacity, such that by the beginning of 2010 the aluminum filter production capacity had been doubled to 1.5 million pieces per year.
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