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Danareksa Equity Snapshot - GGRM, 07 Desember 2018
December 07, 2018 15:17

Gudang Garam(GGRM IJ)

More growth to come


We maintain our BUY recommendation on GGRM with a higher TP following the strong volume growth in 9M18. With more growth expected in 2019 on the back of government plans to maintain cigarette excise tariffs, we believe that the company is well placed to record higher FY19 earnings growth.


Strong 9M18 volume growth of 7% yoy. We recently met with the management of Gudang Garam and learned that the company continued to record strong volume growth in 9M18 of around 7% yoy, mainly supported by solid sales of value-for-money products. In November 2018, the company launched a new Low Tar Low Nicotine cigarette product, GG Move 12 sticks with a competitive retail selling price of IDR13,500/pack (banderol price of IDR13,450/pack). Based on our calculations, the net revenues margin for this product is around 26%. While it is still too early to gauge the market’s response, the company’s strategy of launching a new product at an affordable price point should complete its product portfolio. According to our survey, GGRM’s SKM cigarettes are offered at retail selling prices ranging from IDR15,500/pack (GG Signature Blue 16s or GG Surya 12s) to IDR23,000/pack (GG Surya 16s).


FY19F earnings expected to grow 17.2% yoy. Following the strong sales volume in 9M18, we revise up our FY18-19F sales volume growth estimates to 7.1% and 8.1% from 4.5% and 3.9%, previously. Higher FY19F sales volume coupled with estimated 7.6% blended ASP growth should lead to brisk 16.1% yoy revenues growth in 2019. To be conservative as we await the official regulation on 2019’s excise tax, we maintain our FY19F forecasts for excise tax growth of 5.8% and 10.9% yoy for SKT and SKM. Nonetheless, higher ASP and sales volume increases should help lift the gross margin to 20.4%. Combined with maintained opex, we now estimate FY19F earnings of IDR9.8tn, +17.2% yoy (revised up by 6.4%).


Maintain BUY with a higher TP. All cigarette players should benefit from the decision not to increase 2019’s excise tariffs. Bear in mind that over the past 5 years, the government has raised cigarette excise tariffs by around 10-15% each year, resulting in falling industry sales volume. As such, over the long term, the decision not to raise 2019’s excise tariffs will provide room for better sales volume growth next year. Incorporating our new forecast in our valuation, we arrive at a higher TP of IDR98,400 – based on DCF (WACC 10%, TG 3%). The drivers are the expectation of continued solid volume growth approaching the elections and the decision not to hike excise tariffs. BUY maintained.


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