TOBACCO SECTOR UPDATES
Continue to Face Big Challenges
Industry sales volume dropped by -9.42% YoY in 3Q20; HMSP’s sales underperformed the industry
According to Phillip Morris International (PMI) earnings result, Indonesia's cigarette industry volume declined by -9.42% YoY to 70.2bn sticks in 3Q20 (vs -17.53% YoY in 2Q20); primarily reflecting the impact of significant excise tax-driven ASP increases and lower average daily consumption due to pandemic. However, on quarterly basis, this result actually better-than-expected whereas sales volume slightly increase to 6.2bn sticks (+9.69% QoQ) in 3-months. Meanwhile, HMSP IJ 3Q20 sales volume dropped by -20.80% YoY to 19.8bn sticks (vs -27.31% YoY in 2Q20); underperforming the industry, leading to further market share loss by 4.05ppt to 28.21% from 32.26% in 3Q19. Cumulatively, HMSP’s volume during 9M20 reached 58.3bn sticks (-19.03% YoY), in line with our estimate. The sharp fall in HMSP’s market share was mainly due to: 1) adult smoker down-trading to the tax-advantaged ‘below tier-1’ segment; 2) impact of elevated price gaps in the tier-1 segment (partly due to the delay in minimum price enforcement); 3) disproportionate impact of stricter public mobility restrictions in urban areas, where HMSP’s share is higher. We believe GGRM IJ volume was also dropped by 7%-8% YoY in 3Q20; relatively better than HMSP, bringing the 9M20 earnings to IDR5.65tn lower by 22% YoY.
Waiting for the Upcoming 2021 Excise Tariffs Decision
Based on the State Budget Draft Bill of Fiscal Year 2021, the government targets excise tax revenue to IDR178.47tn in FY21F, compared to IDR172.20tn this year. Indonesian government will immediately take a decision on increasing tobacco excise tariff (CHT) by Nov-2020 to a range of 13%-20%, slightly above the consensus’ estimates. Meanwhile, Finance Minister proposed a figure of 17%. We believe higher tax hike will hurt the industry, especially during the pandemic that players may not be able to fully pass on the tax hike. Thus, based on our sensitivity scenario, a 1% additional excise tax hike in FY21F would lead to 3%-5% lower net profit growth. Our FY21F best case net profit assumes blended excise tariff hike of 10%. We also have prepared a scenario if excise tax hike to 17% level (+7% ASP; -2% to -5% volume), net profit margin will potentially decline by 180/250bps YoY in FY21F for HMSP IJ/GGRM IJ, respectively.
Stocks experienced tremendous selling pressure: Is the current slump already Priced In?
Tobacco player stocks falling deeper at around 23%-32% YTD following the new cigarette excise tax rate by 23% in early 2020 and a lower sales volume. We believe that current valuation (-2STD below mean) has already been priced in; which has reflected a decrease in net profit margin to 180bps-250bps in FY21F, based on our worst case scenario. We estimate excise tax hike and full enforcement of retail price floor to affect volume growth in FY20E-FY21F. The industry volume is expected to decline by 12.5% YoY in FY20E, driven by higher retail price and lower daily consumption due to pandemic. Moreover, we expect lower marketing and GA costs should support earnings.
Neutral Outlook with Top Picks: GGRM IJ (BUY; TP:IDR55,000) and HMSP IJ (BUY; TP:IDR1,700)
Based on some positive catalysts and potential risks, we maintain our NEUTRAL recommendation for Indonesia’s tobacco sector. The further clarity on planned cigarette excise tax raise will drive the market. Valuation wise, tobacco players are currently traded at 10.47x-16.84x PE or -2STD of its 5-years mean. Considering the higher dividend yield of 6%-8% pa., we prefer: 1) GGRM IJ (BUY; TP: ID55,000) which benefited from higher demand in the SKM FF segment (high-tar nicotine); 2) HMSP IJ (BUY; TP: IDR1,700) given its higher dividend payout ratio than GGRM. Risk to our call: 1) Higher-than-expected excise tax hike; 2) Lower consumer pocket during the pandemic.
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