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Gudang Garam (GGRM.IJ IDR 32,400 SELL TP: IDR 28,600)
September 14, 2021 09:33

More headwinds ahead


GGRM reported encouraging 1H21 sales volume. More price adjustments in 3Q21 may spark hopes of better profitability ahead. However, the 2022 excise tax tariff overhang remains with an announcement expected in October 2021. Following soft 1H21 results, with expectations of double-digit growth in 2022 that will push cigarette players to increase prices aggressively in subsequent months, we lower our FY21-22 earnings estimates. Downgrade to SELL.  


1H21 volume growth of 7.3% yoy. GGRM reported positive 1H21 volume growth of 7.3% yoy, driven by SKM (+8.1% yoy), while SKT fell 2.2% yoy. In 1H21, the ASP of SKM only grew 5.4% yoy while SKT ASP – with no excise tax increase this year – rose by 2.2% yoy. To pass on higher excise tax, GGRM increased the ASP of its products in April, May, July and September 2021. Based on our calculations, the ASP of GGRM’s products will require additional increases of an average of 10% to pass on the 2021 excise tax.  


Expect lower FY21 earnings on lower margins. The company emphasized that the price adjustments going forward will hinge on the market’s response to current cigarette prices, affordability, and competition from peers. We estimate FY21 volume growth of 0.5% yoy, lower than the 1H21 growth of 7.3% as we expect slower volume growth with aggressive price increases to pass on 2021 excise tax and anticipation of 2022 excise tax to curb sales volume in 2H21. We estimate 11.2% blended ASP increases for 2021, leading to a lower FY21 gross margin at 11.7%. Lower-than-expected gross margins have prompted us to revise down our FY21 earnings by 26.7%. 


Unexciting FY22 earnings with double digit excise growth. We need to wait on the MOF regulation regarding the 2022 excise tax tariff for cigarettes. We use the assumption of 12% yoy excise tax increases for SKM in 2022, while for SKT, we estimate 3.7% yoy increases. With brisker economic activities expected in 2022 to support +0.5% yoy FY22 volume growth, we expect the company to pass on higher excise, resulting in maintained FY22 gross margins at 11.8%. This will filter through to FY22 net profits of IDR5.7tn (+2.9% yoy).  


Downgrade to SELL. The preference for SKM FF will sustain GGRM’s sales volume ahead. However, we think there will be a further downgrade from the consensus to take into account the soft 1H21. We see headwinds ahead until there is further clarity on 2022 excise tax. We downgrade our recommendation to SELL based on FY22F PE 9.6x with a TP of IDR28,600. Upside risks to our TP include simplification of the excise tax structure that benefits tier-1 producers and moderate (single digit) excise tax growth from the Tier-1 category.


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