TP raised to Rp2,506, maintain BUY
Although our sales target remains unchanged, we slightly raise our net earnings forecast because of the acquisition of a 49% stake in PT Hydraxle Perkasa, its sister company. We also adjust our macro assumptions, as well as the debt portion in our WACC calculations (to 40% from 30% previously) and our cost of debt assumption (to 10.5% from 11% previously). Consequently, we raise our Target Price to Rp2,506, implying PER FY12-13 of 15.0-13.3x. The stock currently trades at an attractive valuation of 11.2-9.9x PER FY12-13. BUY maintained.
New Acquisition: PT Hydraxle Perkasa
On 1 May, SMSM bought a 49% stake in PT Hydraxle Perkasa (HP), its sister company, which, according to GIAMM, is the largest manufacturer of dump body hoists for trucks in Indonesia. In the transaction, SMSM bought 720,588 shares in HP for Rp 113bn or Rp 157/share. This implies PER FY11 for HP of 7.0x. The HP shares sold to SMSM are entirely new shares. Proceeds raised from the transaction will be used by HP to repay its entire debts of Rp 42bn with the remainder used to fund expansion of its facilities and for working capital. SMSM has the option to buy another 2% stake in HP before 31 December.
Earnings Boost from the New Acquisition
SMSM's needs for molds and dies are met by HP. As a result, the acquisition of a 49% stake in HP will guarantee continuity in the supply of molding products. In FY08-11, HP's revenues and net profits grew by CAGR 24.3% and 84.1%, respectively. Looking ahead, with further strong growth anticipated in Indonesia's mining sector, we expect HP's net earnings to show stronger growth. SMSM's share of HP profits shall be incorporated using the equity method. Moreover, the acquisition should also be earnings boosting, we believe, since our estimates for SMSM's net profits in FY12-13-14 are lifted to Rp 240bn-272bn-312bn (or 2-6% higher than our previous forecast). To fund the acquisition, SMSM has obtained a loan facility without collateral from Mizuho Bank. In this regard, we assume SMSM takes on additional loans of Rp 100bn in FY12. Following the acquisition we now forecast SMSM's gearing ratio to increase to 49% (compared to our previous forecast of 30%).
Generous Final Dividends of Rp50/share
SMSM has announced a FY11 final dividend of Rp 50/share. This comes after the interim dividend of Rp 50/share. Hence, in total, SMSM shall distribute 72% of its FY11 net profits as dividends to its shareholders - as we had previously forecast. SMSM's final dividend of Rp 50/share offers the shareholders an attractive yield of 2.7% at the current share price. The cum-date will be on 29 June with the dividends paid on 17 July. Reflecting the company's guidelines of delivering sustained dividends growth, we forecast SMSM's dividends per share to grow by 6% CAGR in FY12-14, assuming that interim dividends distributed to shareholders are 50% of the total dividends. This suggests a DPR of around 60% in FY12-14 and a dividend yield in FY12 of 5.7% at the current share price.
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