Short description: PT Selamat Sempurna Tbk. manufactures automotive components. The Company offers filters, radiators, condensers, air conditioners, brake and fuel pipes, fuel tanks, mufflers, and machinery spare parts.
SMSM is a consistent wealth creator and it is consistently able to grow its EVA. Its EVA momentum averaged 0.9% for the past 5 years. A very notable achievement. In the last 12 months (Q3 2019), EVA momentum contracted by -1.0%.
Its economic profit margin is exceptional. It placed just below HMSP in my database of now 27 stocks. However, note that EVA margin has been declining since 2017.
The big value drivers for SMSM could be divided into two periods: prior to 2014 and after 2014.
Prior to 2014, a lot of SMSM EVA growth came from productivity gain. Look at EVA margin chart above. EVA margin increased from 5.6% in 2011 to a very high level of 10% in 2014.
Since then, EVA margin stagnated for 2 years and in 2017 began its decline. EVA growth, however, was still supported by a record high sales growth in 2017-2018 averaging 17%.
That growth story is finished in 2019. EVA margin continued to deteriorate. EVA tumbles.
Let’s bring up sales chart.
Automotive industry is predicted to be flat in 2020. It is unreasonable to think SMSM could produce another fantastic growth at least in 2020.
After reading some comments from the management in the news, I notice that the management attributed Q3 2019 sales decline to the slump in coal mining activities (body maker segment).
Considering that, it is highly likely that the sharp ascent in sales from 2017-2018 was due to another boom in coal during that period. That boom has gone bust in early 2019.
On the EVA margin side, the development in invested capital is worrying me.
The chart above is the major reason why EVA margin declined in LTM Q3 2019.
Inventory keeps growing despite contraction in sales. If this trend continues, it would pressure EVA margin even further.
To make it worse, a contraction in sales would bring fixed asset charge higher. SMSM is still far from full utilization. Its filter factories are still running at just 50-60% of its full capacity.
A quick look in invested capital shows that SMSM is very likely in an acquisition spree at least since 2015.
That means they are itching to fasten the production belt. In a flat and especially contracting market, that urge to produce will only increasing capital charge and resulting in contracting EVA margin.
To sum up, I think we would see something like this. There is a good chance it would be worse.
That projection chart above still looks good.... until you realize what the market expects at current price level of 1470/share.
A quick look at history:
SMSM share price exploded during 2012-2014. In every year, SMSM managed to outperform or meet investors’ expectation set a year ago. Example: in 2014, EVA momentum (reality) was 3.1% while a year ago in 2013, investors expected SMSM would score 3.1% (MIM). SMSM met that expectation, and so, investors rewarded its achievement by pushing its share price higher and effectively rising their expectations.
Something different happened during the last leg-up of 2016-2018. Each year of EVA momentum growth was being rewarded with higher expectations. The problem was, SMSM never met that high expectation in any single year.
As I have noticed repeatedly, a weakening real performance coupled with unrealistically high expectations are characteristics of late cycle. I’m afraid SMSM has reached the top of its late cycle in 2018.
True performance has declined, and so with the share price. However, the expectations that would justify its current share price is still very high. To top it off, I think 2020 is another year of EVA contraction.
Elliott Wave
The possibility of late cycle urged me to look with Elliott Wave perspective. Let’s see if I can make a valid 5-wave count.
A valid 5-wave structure. Wave iv of 5 ends above the end of wave i. No rules are broken here. Notice that wave 5 began in 2017. By the way, the low of wave 4 was around 800. And one more thing, my indicators show a divergence between RSI and Composite Index. A bearish signal.
Happy New Year 2020
Climate In Focus
This is a graphic from NASA that shows clearly that climate emergency due to CO2 level is the work of just a single generation, and we are included in that generation.
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