Indonesia Company Focus Gudang Garam Bloomberg: GGRM IJ | Reuters: GGRM.JK Refer to important disclosures at the end of this report DBS Group Research . Equity 17 Jan 2019 Finance L.P. BUY Lighting up (Initiating Coverage) The biggest beneficiary of the improvement in consumption Last Traded Price ( 16 Jan 2019): Rp84,300 (JCI : 6,413.4) power and absence of excise tax hike in FY19F Price Target 12-mth: Rp94,700 (12% upside) Expect revenue and earnings to grow by 12%/33% in FY19F Volume growth would be driven by SKM FF segment Potential Catalyst: No cigarettes excise tax hike in FY19F, improvement Initiate with a BUY call; our preferred pick in the sector in consumption, and improvement in market share. Initiate coverage with a BUY call and TP of Rp94,700. We like Analyst GGRM as (i) a beneficiary of potential higher consumption power, David Arie Hartono +62 2130034936
[email protected] (ii) the absence of excise tax hike should improve its earnings in Price Relative FY19F, and (iii) its valuation looks attractive at 15.7x FY19F PE - Rp Relative Index with the strong improvement in profitability, working capital, and 91,005.0 market share; we believe that GGRM should continue to narrow its 209 81,005.0 189 valuation gap to HMSP (currently, the discount is at 45%). 71,005.0 169 Potentially higher demand for machine made full flavour cigarettes 61,005.0 149 129 (SKM FF) segment. In our view, the gradual improvement in 51,005.0 109 41,005.0 consumption purchasing power, especially in low to mid-level 89 31,005.0 69 income groups, would improve demand for higher tar cigarettes in Jan-15 Jan-16 Jan-17 Jan-18 Jan-19 the SKM FF segment (which is more favored by the low to mid- Gudang Garam (LHS) Relative JCI (RHS) income groups) rather than SPM or SKM LTN (low tar nicotine) Forecasts and Valuation which normally targets the mid to upper income groups.