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Best Performance in the Industry, Supported by Improvement of the SKM Division
GGRM managed to record the best performance in the industry in 1Q18, this is shown by a revenue increased of 10.07% YoY to IDR21.98 trillion. This sales growth was supported by SKM (Sigaret Kretek Mesin) Division with sales increasing by 10.10% YoY, contributing 89.90% of total sales and SKT (Sigaret Kretek Tangan) Division increasing by 6.80% YoY. This 1Q18 revenue is in line with our forecast, representing 23.87%/23.86% of MNCS/Consensus estimate. Net income increased by 0.13% YoY to IDR1.89 trillion, with a margin of 8.61% maintained, which reflects 21.04% of MNCS estimate. Meanwhile, average sales growth in the tobacco industry (HMSP, RMBA, WIMM, GGRM) grew stagnant in the midst of a bottom line which remained in negative territory.
Excise Regulations Becomes the Main Focus
In October 2017, the Government through PMK No.146/PMK.010/2017 decided to raise cigarette excise tariff by 10.04% weighted percentage and set a retail price restriction. The increase in excise tariffs will lead to an increase in the selling price of the products, meanwhile the volume of sales for cigarette issuers is potentially depressed. On the other hand, we believe that demand for cigarettes is inelastic where the market response to changes in demand is small, even though the selling price increases. According to research by Southeast Asia Tobacco Control Alliance, demand for cigarettes in Indonesia will still grow CAGR FY16-FY20E by 2.50%.
BUY Recommendation with Target Price IDR85,100
We recommend BUY for GGRM with TP: IDR85,100 which implies PE/PBV 19.50x/3.66x on FY18E and PE/PBV 17.54x/3.43x in FY19F. GGRM is currently trading at –1 STD (average 3-year P/E) with P/E at 17.39x, discounted 50.27% of HMSP traded on –1 STD (average 3-year P/E) at 34.97x. We believe that a healthier cash flow, stable margin, and strength of GGRM in the SKM segment will become an interesting investment story from GGRM. Beside that, the campaign against cigarette consumption will continue to potentially affect sales volume of the tobacco industry.
