Sense of utilization
We visited SMSM main manufacturing filter factories in Tangerang, West Java, where it lies on vast 40ha manufacturing complex within the 75ha area owned by its holding company, the ADR Group. SMSM has six factories in total, to support its manufacturing activities from producing key parts from its raw materials, the assembly line, till the packaging and completed with 15,000m2 warehouse area. The filter factory is fully operated as it labors around 2,000 people, divided into 2-3 shifts per day with some machines which fully operated for 24-hours. To date, filter sales contributes up to 70% of SMSM's revenue, has a maximum capacity of 96mn units per annum and has product variations up to 5,000 types. In 2012, we believe the company can utilize its filter production up to 65% of its total capacity.
The Kaizen approach to quality
Most of SMSM's main raw materials are imported products, such as papers for filters came from distributor in Korea, and the steel plates also came from Posco Korea. The company maintained its supplies by ordered in 3-months inventory and buy at spot price. From its experience, management had chosen to use imported paper and steel plate because it has better quality and durability compared to local producers. SMSM main sales destination to overseas countries has imposed the company to produce qualified products that should meet the international minimum requirements. In addition, SMSM also has the laboratory to do quality assessment and maintained the quality of its products, while at the same time the laboratory also has been use to examine defect items which then allows the company to take further actions to continuously improve its product quality.
Vertically integrated within the group
SMSM manufacturing process showed remarkable vertical integration within the ADR Group which allows the company to capture the margins from various parts of value chain process as well as to maintain the supply level of raw materials. Vertical integration gives room for the company to save in transport costs, experience faster turnover, and to have flexibility in adjusting to changes in product specifications. Furthermore, with the new acquisition of sister company, PT Hydraxle Perkasa (HP), SMSM can have a steady supply of customized steel plates along with the custom molds produced in HP which enables SMSM to sustain as one of the company that have comprehensive range of product variations, especially in filter products.
Maintained BUY
In addition to the strong track record of revenue and dividend growth plus the robust financials, we see SMSM also demonstrate solid competence in vertically-integrated manufacturing. We believe the company still on its track to capture the growth opportunity in filters and radiators market demand. Our Target Price of Rp2,506 implies PER FY12-13 of 15.0-13.3x and currently trades at PER FY12-13 of 11.9-10.3x, lower compared with the 12.9-10.6x peer averages. Remain attractive, BUY maintained.
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