Indonesia Industry Focus
Indonesia Tobacco
Refer to important disclosures at the end of this report
DBS Group Research . Equity 17 Jan 2019
JCI : 6,413.4 Fresh wave of optimism imminent Analyst Cigarettes expected to be one of the consumption David Arie Hartono +62 2130034936 beneficiaries in 2019 [email protected]
Expect volume growth of +1.4% in FY19F vs -2.3% in STOCKS FY17; Key factor is the authorities’ decision to maintain 12-mth excise tax Price Mkt Cap Target Price Performance (%) Initiate tobacco sector with an Overweight call Rp US$m Rp 3 mth 12 mth Rating Initiate GGRM coverage with BUY; HMSP with HOLD Gudang Garam 84,300 11,455 94,700 8.2 144.7 BUY No excise tax hike in FY19F – should improve industry HM Sampoerna 3,850 31,626 4,100 N.A N.A HOLD volume and corporate earnings. There are two factors that Source: DBSVI, Bloomberg Finance L.P. should drive the volume growth in FY19F, (i) improvement in Closing price as of 16 Jan 2019 the cigarette industry’s volume, from the Presidential Election events in April 2019 and, (ii) the government’s decision not to Gudang Garam : PT Gudang Garam Tbk is an Indonesian company raise the excise tax on cigarettes in 2019. For existing cigarette engaged in the manufacturing of cigarettes. The company is a leading producers, this is great news as it would improve affordability manufacturer of kretek cigarettes (these clove-type of cigarettes are a and improve overall industry volume growth. We estimate the trademark of Indonesia). cigarette industry’s volume to grow by 1.4% y-o-y in FY19F. HM Sampoerna : PT Hanjaya Mandala Sampoerna (HM Sampoerna) is We also assume higher earnings growth for both Gudang Indonesia's largest tobacco company controlling about 33% of Garam (GGRM) and HM Sampoerna (HMSP) in FY19F due to Indonesia Tobacco market. The company also distributes the famous the government’s decision not to raise the excise tax. Marlboro brand on the domestic market. Potentially higher demand for machine made full flavour cigarettes (SKM FF) segment. In our view, the gradual Indonesia Tobacco Industry Assumptions
improvement in consumption purchasing power, especially in Industry volume 2016 2017 2018F 2019F 2020F low to mid-level income groups, would improve demand for SKT 57,439 54,102 52,479 51,430 49,887 higher tar cigarettes in the SKM FF segment (which is more SPM 18,936 15,985 15,186 14,426 13,705 favored by the low to mid-income groups) rather than SPM or SKM LTLN 134,446 130,184 126,278 129,183 131,766 SKM LTN (low tar nicotine) which normally targets the mid to SKM FF 104,779 107,129 110,343 113,653 115,926 upper income groups. Total 315,600 307,400 304,286 308,692 311,284 GGRM is our top pick in the sector. We prefer companies y-o-y growth -1.4% -2.6% -1.0% 1.4% 0.8% with more exposure and products in the mid to low income Source: Nielsen and DBSVI Forecast segment in FY19F. We believe GGRM will be in a good position as the company has a very good market share in the SKM FF GGRM and HMSP market share (%) segment and no high-end products in the SPM segment. We estimate GGRM’s market share to improve to 26.9% in FY19F 40.0% 34.9% 34.7% 33.4% from 24.5% in FY17 – as we assume a strong improvement in 35.0% 33.0% 32.3% 32.8% market share in the SKM FF segment. 30.0% 26.9% 25.9% HMSP is not the biggest beneficiary of excise tax status 24.2% 24.5% 25.0% 23.3% 23.1% quo. In our view, the absence of excise tax hikes in FY19F will not benefit HMSP as much as its peers (such as GGRM) in 20.0% terms of volume growth. HMSP is traditionally strong in the 15.0% SKM LTN segment with its Sampoerna A-Mild brand, which is 10.0% typically popular with the younger generation. Furthermore, 5.0%
the potential weighting adjustment in LQ45 and IDX30 could 0.0% poised as an overhang for HMSP share price. Thus, we initiate 2014 2015 2016 2017 2018F 2019F GGRM market share HMSP market share with a HOLD call. Source: Companies, DBSVI forecast
ed: KK/ sa: MA, CW, CS Industry Focus Indonesia Tobacco
Investment Thesis
Initiate the sector with an Overweight call, GGRM is our top improvement in consumption purchasing power, especially in pick. We initiate the tobacco sector with an Overweight call, low to mid-level income groups, would improve demand for on the premise of: higher tar cigarettes in the SKM FF segment (which is more favoured by the low to mid-income groups) rather than SPM - Improvement in earnings from both players under or SKM LTN (low tar nicotine) which normally targets the mid our coverage, HMSP and GGRM. We estimate HMSP to upper income groups. and GGRM to post better earnings growth of Sampoerna A Mild (SKM LTN) market share slipped (%) 29.1%/33.4% y-o-y, respectively. The improvement of earnings will be driven by an improvement in 16.0% gross profit margin (GPM); as we assume flat excise 14.0% tax in FY19F. 12.0% - We estimate an improvement in cigarette volume 10.0% growth in FY19F of 1.4% y-o-y. In our view, the improvement of volume growth will come in 1H19; 8.0% we expect consumption spending to be higher due 6.0%
during this period due to, (i) pre-Presidential Election 4.0% and, (ii) no significant increase in household expenses in 1H19F. In our view, 2H19F volume 2.0% growth will not be too strong on the back of a 0.0% 1Q17 2Q17 3Q17 4Q17 1Q18 2Q18 3Q18 potential hike of fuel price, post Presidential Election. This is more likely to impact consumption spending Sampoerna A Mild Dji Sam Soe Marlboro Sampoerna U Sampoerna Kretek of low to mid-level income groups. - We estimate GGRM and HMSP’s revenue growth of Source: Company 11.7%/9.4% y-o-y respectively in FY19F on the back of better volume growth. No change in excise tax in FY19F, should improve volume and earnings. There are two factors that may somewhat halt the - We remain cautious on the prospects of the overall industry’s volume decline in FY19F, (i) improvement in the cigarettes industry in Indonesia given lower cigarette industry’s volume, even though it would not be too affordability from a potential excise hike in FY20F. significant due to the Presidential Election events in April 2019 Cigarettes expected to be one of the consumption and, (ii) the government’s decision not to raise the excise tax beneficiaries arising from Presidential Election. We think on cigarettes in 2019. For existing cigarette producers, this is things should turn brighter this year for consumption, albeit at great news as it would improve affordability and improve a gradual pace. There are a few favourable factors: (i) the overall industry volume growth. We estimate the cigarette upcoming presidential election, government aid, (ii) low industry’s volume to grow by 1.4% y-o-y in FY19F. We also inflation, (iii) reversal of oil prices, and (iv) no change in assume higher earnings growth for both Gudang Garam electricity tariff. We believe that these factors will be positive (GGRM) and HM Sampoerna (HMSP) in FY19F due to the for consumption trend across the consumer products. government’s decision not to raise the excise tax. The upcoming Presidential Election may translate into a higher FY18F growth driven mostly by price adjustments. The consumption spending in mid to low income segment and it declining rate of cigarette production is expected to continue would immediate translate into spending on cigarettes. We in FY18F, particularly as - at the start of 2018 - a new average prefer companies with more exposure and offerings in the 10.04% excise tax hike came into effect that is expected to mid to low income segments in FY19F. put more pressure on Indonesia's cigarette industry. We Potentially higher demand in SKM FF segment. While we estimate industry volume to decline by 1% in FY18F to assume a recovery in domestic volume growth in FY19F on 304.2bn on the back of higher excise at the beginning of the the back of, (i) higher consumer purchasing power during the year. The growth for both companies under our coverage upcoming Presidential Election which may improve (GGRM and HMSP) came mostly from price adjustments (by 4- consumption in rural areas and, (ii) potential low price 10% in FY18F). adjustments in FY19F in the absence of an excise tax hike, which could improve affordability. In our view, the gradual
Page 2
Industry Focus Indonesia Tobacco
Initiate coverage of Gudang Garam (GGRM) with a BUY call tax revenue target for 2019F by 7.15% to Rp158.8tr (2018F: and TP of Rp94,700. We like GGRM as (i) a beneficiary of Rp148.2tr). The government has also decided to delay the potential higher consumption power, (ii) the absence of excise simplification of the excise tax. Under the currently proposed tax hike should improve its earnings in FY19F, and (iii) its valuation looks attractive at 15.7x FY19F PE - with the strong simplification, small- and mid-sized cigarette manufacturers improvement in profitability, working capital, and market will need to fend for themselves against the bigger players. As share; we believe that GGRM should continue to narrow its of end-October 2018, excise tax revenue collection reached valuation gap to HMSP (currently, the discount is at 45%). Rp106tr (+9.8% y-o-y) with 95% coming from tobacco excise tax. We expect excise tax to head north in FY20F after being Initiate HM Sampoerna (HMSP) with HOLD call and TP of kept stagnant in FY19F; as the government still plans to Rp4,100. We commence coverage on HMSP with a TP of collect more excise tax from the cigarette industry. This would RP4,100 that implies 30x FY19F PE. Our HOLD call is based impact the cigarette industry via: (i) a likely decline in cigarette on: (i) potential downside from the current level, on the back industry volume in FY20F, and (ii) lower earnings growth for of LQ45 and IDX30 index rebalancing, and (ii) HMSP not being cigarette players in FY20F. the biggest beneficiary of constant excise tax in FY19F, given its strong market share in machine-made clove cigarettes with Sensitivity analysis of excise tax hike on HMSP’s earnings. Our low tar and nicotine (SKM LTN) and hand rolled-clove sensitivity analysis shows that every 10% hike in excise tax on cigarettes (SKT), instead of SKM FF (SKM full-favour cigarettes, SKM will impact HMSP‘s net profit by -25%. We estimate that i.e. the “value” segment). every 10% hike in excise tax on SKT will impact HMSP‘s net profit by -3%. Key Risks
Sensitivity analysis on excise tax to GGRM earnings. Based on Fears that the Indonesian government will increase excise tax our calculation, every 10% hike in excise tax on SKM will further in FY20F. Early this year, the Indonesian government impact net earnings negatively by 35%. We estimate that confirmed that it will not increase the excise tax on cigarettes every 10% hike in excise tax on SKT will impact net earnings in 2019. As this should give some breathing space to the negatively by 6%. cigarette industry, we estimate that the industry volume could improve in FY19F. This would somewhat upset the government’s excise tax revenue collection for 2019 as it had previously decided to increase the APBN 2019 tobacco excise
Page 3
Industry Focus Indonesia Tobacco
GGRM PE Band (x) HMSP PE Band (x)
Source: Bloomberg Finance L.P., DBSVI Estimate Source: Bloomberg Finance L.P., DBSVI Estimate
GGRM EV/EBITDA (x) HMSP EV/EBITDA (x)
(x) (x) 13.0 +2 stdev 40.0
+1 stdev 35.0 +2 stdev 11.0 Average 30.0 +1 stdev
-1 stdev Average 9.0 25.0 -2 stdev -1 stdev 20.0 -2 stdev 7.0 Jan-15 Jan-16 Jan-17 Jan-18 15.0 Jan-15 Jan-16 Jan-17 Jan-18
Source: Bloomberg Finance L.P., DBSVI Estimate Source: Bloomberg Finance L.P., DBSVI Estimate
Page 4
Industry Focus Indonesia Tobacco
Peers valuation Company Code Market Cap US$mn P/E (x) P/B (x) EV/EBITDA (x) EV/Sales (x) ROE (%) DIV Yield (%) 19F 20Y 19F 20Y 19F 20Y 19F 20Y 19F 20Y 19F 20Y Indonesia Consumer Indofood CBP Sukses Makmur Tbk PT ICBP IJ Equity 8,321.1 24.2 22.2 4.8 4.3 14.7 13.4 2.6 2.3 19.7 19.2 2.1 2.3 Indofood Sukses Makmur Tbk PT Indf IJ Equity 4,636.8 14.2 13.4 1.8 1.7 7.4 7.3 1.2 1.0 13.0 12.8 3.5 3.7 Mayora Indah Tbk PT MYOR IJ Equity 4,312.2 33.9 0.0 6.5 0.0 17.5 0.0 2.4 0.0 19.3 0.0 0.9 0.0 Unilever Indonesia Tbk PT UNVR IJ Equity 26,601.2 52.7 50.5 70.6 66.7 36.3 34.8 8.8 8.4 134.0 132.2 1.9 2.0 Nippon Indosari Corpindo Tbk PT ROTI IJ Equity 537.6 37.5 30.8 2.5 2.4 18.0 14.4 2.3 2.0 6.7 7.6 0.4 0.5 Simple Average (Consumer - Indonesia) 32.5 23.4 17.2 15.0 18.8 14.0 3.4 2.8 38.5 34.4 1.8 1.7
Indonesia Cigaret t es Gudang Garam Tbk PT GGRM IJ Equity 11,411.3 15.6 14.8 3.2 2.9 10.7 10.0 1.7 1.6 21.5 20.5 2.9 3.8 Hanjaya Mandala Sampoerna Tbk PT HMSP IJ Equity 31,637.2 28.1 26.4 12.0 11.7 20.3 18.9 3.9 3.5 44.8 44.7 2.8 3.6 Simple Average (Cigarette - Indonesia) 21.9 20.6 7.6 7.3 15.5 14.4 2.8 2.5 33.1 32.6 2.8 3.7
United Kingdom British American Tobacco PLC BATS LN Equity 73,747.8 7.9 7.4 0.9 0.8 8.8 8.3 4.0 3.9 11.3 11.7 8.4 8.9 Imperial Brands PLC IMB LN Equity 29,759.2 8.8 8.4 4.1 4.1 8.6 8.2 3.9 3.7 41.4 45.8 8.6 9.3 Simple Average (Cigarette - United Kingdom) 8.4 7.9 2.5 2.5 8.7 8.3 4.0 3.8 26.3 28.7 8.5 9.1
United States Philip Morris International Inc PM US Equity 109,593.9 13.4 12.2 - - 10.6 9.8 4.5 4.3 - - 6.7 7.0 Altria Group Inc MO US Equity 90,025.1 11.2 10.6 5.0 4.9 9.6 9.3 5.1 5.1 45.3 46.6 6.9 7.2 Simple Average (Cigarette - United States) 12.3 11.4 5.0 4.9 10.1 9.5 4.8 4.7 45.3 46.6 6.8 7.1
Ot hers Japan Tobacco Inc 2914 JP Equity 49,442.4 11.9 11.1 1.7 1.6 8.2 7.8 2.7 2.6 15.7 16.4 6.0 6.5 KT&G Corp 033780 KS Equity 12,292.1 12.4 11.5 1.5 1.4 7.1 6.6 2.3 2.1 12.8 13.0 4.3 4.4 British American Tobacco Malaysia Bhd ROTH MK Equity 2,552.8 20.8 19.0 25.7 24.9 15.7 14.5 3.4 3.2 120.7 128.5 4.7 5.2 Simple Average (Cigarette - All) 14.5 13.5 6.8 6.5 11.1 10.4 3.5 3.3 26.4 26.7 5.7 6.2 Source: Bloomberg Finance L.P., DBSVI
Page 5
Industry Focus Indonesia Tobacco
Flat excise tax to boost industry in FY19F
Indonesia is located in the heart of Southeast Asia and has Despite positive factors, profitability of Indonesia’s cigarette more than 260mn population. Indonesia is the fourth most manufacturers has come under pressure in recent years. The populous country in the world. The economy of Indonesia decline in profitability is due to government policies such as, (i) relies heavily on consumption, with consumer spending mandatory graphic warnings on cigarette packages to contributing more than 50% of the nation’s output. In discourage consumption of cigarettes, (ii) restrictions on Indonesia’s consumption landscape, cigarettes are considered cigarette and tobacco products’ advertising by authorities in an essential need, after processed food and beverages. recent years and, (iii) the most negative impact is from the Indonesia’s tobacco industry is still huge. Indonesia has a huge Indonesian government’s tendency to raise excise tax rates on population. It is also estimated that around 60% of tobacco products at the start of the year. This is to collect tax Indonesian men smoke cigarettes. The level of cigarettes revenue as well as to discourage the consumption of consumption remains quite low due to lower disposable cigarettes (the higher excise should lead to higher retail income. prices). The cigarette industry affects Indonesia’s economy at many Such measures have had an impact on the cigarette industry. levels. The vast demand for cigarettes means that the tobacco Excise tax revenue realisation in the domestic cigarette sector is one of the largest and most important industries in industry fell in 2017, despite the implementation of an Indonesia. average 12.26% excise on retail cigarette prices at the start of that year. In other words, people consumed fewer cigarettes Why has cigarette volume declined in the past few years? In the due to the higher prices. The tobacco industry’s volume past, regional minimum wage (UMR) growth outpaced excise declined 2.6% y-o-y to 307.4bn cigarettes. This declining rate tax growth, leading to better volume growth of the tobacco of cigarette production is expected to continue in FY18F, industry, due to the two main reasons: particularly as - at the start of 2018 - a new average 10.04% - Most smokers in Indonesia are in the low to mid- excise tax hike came into effect that is expected to put more income groups, which are more sensitive towards pressure on Indonesia's cigarette industry. We estimate the selling price movements. industry volume to decline by 1% in FY18F to 304.2bn on the - Higher UMR growth enables the low to mid-income back of higher excise at the beginning of the year. groups to have higher disposable income.
However, the situation has changed in the past three years. Indonesia tobacco industry volume (in mn sticks)
Excise tax growth has outpaced UMR growth, resulting in a 100% softening of purchasing power in the low to mid-income 90% groups. This has caused cigarette volume to decline to single 80% digit growth. 70% 60%
50%
Lower UMR growth (%) + higher excise growth (%) = 40% decline in cigarette volume growth (%) 30% 20% 25.0% 10%
0% 20.0% 2010 2011 2012 2013 2014 2015 2016 2017 2018F 2019F 2020F 2021F 2022F SKT SPM SKM LTLN SKM FF Total 15.0% Source: Company, Nielsen, DBSVI
10.0% Policies that could bring short term optimism in FY19F. In November 2018, two policies were announced that brought a 5.0% wave of optimism to Indonesia's cigarette industry, even
0.0% though the impact will only be temporary, in our view. First, 2010 2011 2012 2013 2014 2015 2016 2017 Indonesia’s Finance Minister Sri Mulyani Indrawati confirmed -5.0% that Indonesia will not raise the excise tax on cigarettes in % Cigarettes industry volume growth (%) % UMR growth (%) % excise SKM growth (%) % excise SKT growth (%) 2019. Second, as part of the 16th economic policy % excise SPM growth (%) package the Indonesian government decided to remove the Source: Indonesia Statistic Bureau and Ministry of Finance clove and white cigarette production manufacturing industry
Page 6
Industry Focus Indonesia Tobacco
from the Negative Investment List (this list includes all sectors - Indonesians prefer kretek (clove) cigarettes, that are closed or partially closed to foreign investment). especially SKM FF or SKT For existing cigarette producers, it is great news that the - Pricing of Kretek Cigarettes is cheaper vs white excise tax will not be raised at the start of 2019. A big chunk cigarettes due to lower excise tax of cigarette manufacturers' costs of goods sold (COGS) - In terms of tar, the kretek cigarette is higher vs white involve excise taxes. The decision to leave the excise tax cigarettes. Which resulted into a longer smoking time unchanged next year could lead to a rise in volume of vs white cigarettes cigarette sales next year. We estimate the tobacco industry In our view, the industry will benefit from (i) better volume volume to grow by 1.4% y-o-y in FY19F on the back of, (i) flat outlook performance on the back of potential higher excise tax and, (ii) potentially higher demand on the back of consumption spending in rural areas in FY19F on the back of higher disposable income from reduced expenses and impact Presidential election, and (ii) no excise tax hike in FY19F which of pre-election on Indonesia’s consumption spending. could result into a higher affordability.
In particular Gudang Garam (GGRM) is expected to benefit Cigarettes industry volume assumptions (mn sticks) from this decision as the company dominates in the middle 2016 2017 2018F 2019F 2020F and lower class segments (these segments are more SKT 57,439 54,102 52,479 51,430 49,887 vulnerable to price fluctuations). In terms of pricing, their SKM SPM 18,936 15,985 15,186 14,426 13,705 FF products like Gudang Garam International (the biggest SKM LTLN 134,446 130,184 126,278 129,183 131,766 market share in SKM FF) is slightly cheaper compare to peers SKM FF 104,779 107,129 110,343 113,653 115,926 Total 315,600 307,400 304,286 308,692 311,284 pricing (please refer to chart cigarettes retail price below). y-o-y growth -1.4% -2.6% -1.0% 1.4% 0.8% SKM FF volume growth (%) improved in the last election
30.0% Source: Nielsen and DBSVI Forecast 25.0%
Cigarette companies excise cost to revenue (%) 20.0%
80.0% 73.4% 15.0% 72.2% 69.8% 69.8% 70.0% 10.0%
58.8% 59.6% 60.0% 5.0% 55.5% 55.5% 55.9% 53.2% 54.0% 53.6% 53.3% 53.7% 0.0% 50.0%
-5.0% 40.0% -10.0%
30.0% -15.0%
20.0% -20.0% 2011 2012 2013 2014 2015 2016 2017
10.0% SKT y-o-y growth SPM y-o-y growth SKM LTN y-o-y growth SKM FF y-o-y growth
0.0% 2011 2012 2013 2014 2015 2016 2017 HMSP excise cost to revenue (%) GGRM excise cost to revenue (%) Source: Companies, Nielsen
Source: Companies Long term outlook for Indonesia tobacco industry remain …theoretically, Presidential election will drive cigarettes attractive. In our view, the cigarettes industry remains volume especially for SKM FF in FY19F. We view a higher attractive given that an improvement in the income growth consumption spending in rural area during pre-Presidential will increase the cigarettes volume going forward. At the election especially in the SKM FF products. If we looked back moment, the low to mid income level which is the target at the last Presidential Election in 2014, the SKM FF volume market of cigarettes industry face a pressure from a higher was actually increased significantly compare to the other cost of living (and less disposable income to cigarettes). The products. In our view, it was due to: cigarettes consumption in the low to mid level is only 8-9 sticks/day (based on our back to envelope calculation). We
Page 7
Industry Focus Indonesia Tobacco
view that there is a potential upside to the cigarettes volume (in Java area); the cigarettes consumption that one person can going forward. afford are 8 sticks a day (in outside Java) and 9 sticks a day (in Based on our simulation analysis, with assumption of income Java) which is still consider quite low compare to other level of Rp2mn/month (in outside Java) and Rp3.5mn/month countries.
Simulation on cigarettes consumption in Java area Java Average level of income 3,500,000
Food Quantity Unit Price Active Smokers (mn) 80,000,000 Rice 10 kg 8,500 85,000 On Average Indonesia smokes 12 Sticks/day Fish 3 kg 15,000 45,000 Current Budget 9 Sticks/day Beef 1 kg 100,000 100,000 Budget Left 1,255,000 Chicken 2 kg 29,000 58,000 % Cigarette allocation 0 Eggs 3 kg 20,000 60,000 Extra Cigarette Budget Allocation 100,400 Noodle 15 pcs 2,500 37,500 Cigarette Sticks 80 per 30 days Chili 1 kg 15,000 15,000 Additional Sticks 3 each day Spices 1 20,000 40,000 Total Cigarette Consumption per day 12 Cigarette 22 packs 16,000 352,000 Soy Product 3 kg 12,000 36,000 Sugar 2 kg 11,000 22,000 Flour 2 kg 20,000 40,000 Total Food 890,500 Non Food Expenses Fuel 13 Litre 6,500 84,500 Electricity 200,000 Gas 70,000 Housing 1,000,000 Total Non Food 1,354,500 Total 2,245,000 Source: DBSVI forecast
Simulation on cigarettes consumption in Outside Java Outside Java Average level of income 2,000,000 Food Quantity Unit Price Active Smokers (mn) 80,000,000 Rice 8 kg 8,500 68,000 On Average Indonesia smokes 12 Sticks/day Fish 2 kg 15,000 30,000 Current Budget 8 Sticks/day Beef 1 kg 100,000 50,000 Budget Left 677,000 Chicken 2 kg 29,000 58,000 % Cigarette allocation 0 Eggs 3 kg 20,000 60,000 Extra Cigarette Budget Allocation 54,160 Noodle 20 pcs 2,500 50,000 Cigarette Sticks 43 per 30 days Chili 2 kg 15,000 30,000 Additional Sticks 2 each day Spices 1 20,000 40,000 Total Cigarette Consumption per day 10 Cigarette 20 packs 15,000 300,000 Soy Product 5 kg 12,000 60,000 Sugar 2 kg 11,000 22,000 Flour 2 kg 20,000 40,000 Total Food 808,000 Non Food Expenses Fuel 10 l 6,500 65,000 Electricity 80,000 Clothes Gas 70,000 Housing 300,000 Total Non Food 515,000 Total 1,323,000 Source: DBSVI forecast
Page 8
Industry Focus Indonesia Tobacco
Cigarettes consumption per person (Rp) Tobacco and Betel (Rp/person) 2012 2013 2014 2015 2016 2017 Sumatra Utara 49,679 52,723 57,809 69,801 69,962 67,058 Sumatera Selatan 46,796 51,123 58,965 80,539 66,728 74,833 Bangka Belitung 77,887 74,307 66,676 94,613 91,218 99,316 DKI Jakarta 56,571 52,588 60,358 65,423 65,486 72,351 Jawa Barat 43,304 47,669 54,315 69,674 68,302 70,437 Jawa Timur 29,186 34,801 41,011 53,595 52,600 53,595 Kalimantan Timur 51,092 63,675 69,292 69,579 69,292 66,991 Kalimantan Selatan 50,774 56,363 51,843 64,100 63,493 62,367 Sulawesi Selatan 38,674 40,651 46,476 59,029 56,309 55,824 Papua Barat 51,711 61,680 60,595 54,009 74,055 76,657
% increase 2012 2013 2014 2015 2016 2017 Sumatra Utara 6.13% 9.65% 20.74% 0.23% -4.15% Sumatera Selatan 9.25% 15.34% 36.59% -17.15% 12.15% Bangka Belitung -4.60% -10.27% 41.90% -3.59% 8.88% DKI Jakarta -7.04% 14.78% 8.39% 0.10% 10.48% Jawa Barat 10.08% 13.94% 28.28% -1.97% 3.13% Jawa Timur 19.24% 17.84% 30.68% -1.86% 1.89% Kalimantan Timur 24.63% 8.82% 0.41% -0.41% -3.32% Kalimantan Selatan 11.01% -8.02% 23.64% -0.95% -1.77% Sulawesi Selatan 5.11% 14.33% 27.01% -4.61% -0.86% Papua Barat 19.28% -1.76% -10.87% 37.12% 3.51% Source: Indonesia Statistic Bureau
Cigarettes retail prices (Rp) Brand 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 1Q18 2Q18 Gudang Garam Products GG Merah 8,200 8,500 8,725 9,074 9,617 9,700 9,756 10,018 10,317 10,607 10,800 10,884 11,033 11,313 GG Internasional 11,375 11,750 11,975 12,559 13,311 13,450 13,519 13,848 14,167 14,460 14,700 14,867 15,122 15,317 Surya 16 14,700 15,100 15,650 16,443 17,350 17,350 17,461 17,951 18,200 18,498 18,600 18,798 19,244 19,627 ProMild 9,550 9,800 10,050 10,564 10,900 10,900 11,011 11,582 12,100 12,614 13,000 13,327 13,750 13,750 GG Mild 10,450 10,700 10,950 11,593 12,500 12,500 12,556 12,876 13,300 13,466 13,800 14,066 14,522 14,700 HM Sampoerna Products A Mild 16 15,850 16,135 16,551 17,033 17,827 18,242 19,121 19,704 19,906 20,013 20,225 20,588 21,125 21,754 DSS 12 13,554 13,831 14,002 14,225 14,534 14,792 15,036 15,192 15,309 15,430 15,649 15,975 16,134 16,344 DSS Magnum Filter 12 12,224 12,520 12,835 13,091 13,583 13,911 14,563 14,946 15,571 15,799 16,019 16,224 16,519 16,946 DSS Magnum Mild 16 13,107 13,253 13,902 14,942 15,678 Marlboro Red 20 17,532 17,880 18,312 19,013 19,760 19,866 20,626 21,554 22,112 22,711 23,310 24,118 24,842 25,081 Marlboro Filter Black 20 19,992 20,116 20,211 20,430 21,033 21,848 U Mild 16 11,361 11,807 12,130 12,686 13,127 13,502 14,198 14,846 15,083 15,312 15,873 16,696 16,956 17,563 U Bold 12 9,998 10,092 10,091 10,095 10,025 10,004 10,203 10,989 11,571 11,849 11,974 12,087 12,148 12,617 Sampoerna Kretek 12 9,710 9,854 10,031 10,255 10,817 11,040 11,370 11,624 11,825 11,923 12,042 12,147 12,232 12,268 Source: DBSVI
Page 9
Industry Focus Indonesia Tobacco
Indonesia Tobacco Industry
Clove (or kretek) cigarettes dominate the market Indonesia: Cigarettes market share (%) - 2017
SPM The Indonesian cigarettes market is quite different than other 5% Hand-Made countries, with kretek (clove cigarettes, made with a blend of Kretek (SKT) 18% tobacco and cloves) accounting for 94% of overall market share in 2017, according to data from Philip Morris International (PMI). White cigarettes (called SPM, Sigaret Putih Machine in Indonesia) accounted for only 6% of overall market share in
2017. The continued prevalence of kretek cigarettes (SKM – Machine- Made Kretek Sigaret Kretek Machine (machined-made), and SKT - Sigaret (SKM) Kretek Tangan (hand-rolled)) over white cigarettes in recent 77% years suggests that adult Indonesian smokers continue to have strong preference for kretek over white cigarettes. In our view, the reasons underlying this are: Source: PMI USA Annual Report - Pricing of Kretek Cigarettes is cheaper vs white cigarettes due to lower excise tax Based on data over the past few years, Indonesia’s cigarette - Kretek cigarettes have higher tar level vs white market has experienced a shift in adult smoker demand from cigarettes, resulting in longer smoking time. hand-rolled cigarettes (SKT) to machine-made cigarettes (SKM), - with growing preference for lower tar and lower nicotine In Indonesia, kretek cigarettes are divided into two categories - cigarettes. hand-rolled cigarettes (SKT) and machine-made cigarettes (SKM). To fulfill different tastes, white cigarettes have also The weak performance of hand-rolled kretek cigarettes (SKT) become favoured in Indonesia but with only limited market and white cigarettes (SPM) is not surprising. Demand for SKT share has been falling steadily for years due to shifting consumer preferences, and SPM was not that popular to begin with. Classification of cigarettes in Indonesia SKM vs SKT market share (2011-2017)
80%
70%
60%
50%
Source: DBSVI 40%
30%
Indonesia: Cigarettes market share (%) 20%
100% 10% 90% 0% 80% 2011 2012 2013 2014 2015 2016 2017 35.29% 70% 63.75% Hand Made Kretek (SKT) Machine Made Kretek (SKM) 68.58% 72.62% 73.35% 73.82% 74.79% 60% 50% Source: PMI USA Annual Report 40% 30% 28.63%
30.70% 20% 25.43% 21.67% 20.88% 20.72% 20.23% 10% 0% 2011 2012 2013 2014 2015 2016 2017 White Cigarette (SPM) Hand Made Kretek (SKT) Machine Made Kretek (SKM)
Source: PMI USA Annual Report
Page 10
Industry Focus Indonesia Tobacco
SKM FF and SKM LTN volume (in bn sticks) the increase in excise tax on cigarettes in Indonesia, a packet 120.0 of 20 sticks of cigarettes is still the cheapest in the world. +7.3% CAGR -1.5% CAGR between FY14-17 between FY14-17 Research indicates that the majority of Indonesia’s poor 100.0 population would actually spend on cigarettes rather than on food. The poor spend an average six times more on tobacco 80.0 -5.5% CAGR than on dairy and egg products. It is not surprising that sales between FY14- 17 of cigarettes in Indonesia amount to billions every year. 60.0 Indonesia has more than 70mn active smokers. In Indonesia, it 40.0 is very common for men to smoke. 7 out of 10 Indonesia men smoke. On the other hand, only 3 out of 10 women are active 20.0 smokers. Smoking is a habit that is cultivated from a very young age in Indonesia, with active smokers starting at 15 0.0 SKM FF SKM LTN SKT years old. On average, an Indonesian smoke 13 sticks per day 2014 2015 2016 2017
Source: Nielsen Cigarettes per smokers per day – Indonesia vs others
40 Three Indonesian players control the market 35 The Indonesian tobacco market is controlled by three big players 30 with 77% market share, based on data from Euromonitor as of
December 2016. The three players are, (i) HM Sampoerna 25 (HMSP), (ii) Gudang Garam (GGRM) and, (iii) Djarum. Other than the three big players, there are several players such as the 20 Bentoel Group (RMBA) and Wismilak (WIIM) that controlled 8% 15 market share in 2016. There are also 487 small scale producers 13 (based on data in 2017) targeting mainly the local market. 10
Indonesia: Cigarette companies’ market share (%) - 5 2016
0
PHP
USA
Taiwan
Malaysia
France HK UK
China Korea
India
Germany
Indonesia
Thailand
Japan
Russia Singapore Wismilak 1% Others 9%
Nojorono Gudang 6% Garam 29% Source: Euromonitor Bentoel 7% Indonesia smoking prevalence
80.0% Djarum 13% 70.0%
60.0%
Sampoerna 50.0% 35%
40.0%
Source: Euromonitor 30.0%
20.0%
Indonesia is famous for its male smokers, starting the 10.0% habit from 15 years or older. 0.0% 1995 2001 2004 2007 2010 2011 2013 2016 Total Male Female While smoking is decreasing across the world, it is actually increasing in Indonesia. The country has a large number of Source: RISKESDAS (2007,2010,2013) and Tobacco Atlas smokers, the majority being teenagers and children. Despite
Page 11
Industry Focus Indonesia Tobacco
Indonesia top 15 consumption per capita/month Year Items 2013 2014 2015 2016 2017 %of total CAGR Housing, Gas, Electricity , and Water 142,088 161,059 234,139 251,692 249,644 24.09% 15.1% Prepared Food and Drink 92,254 103,762 109,968 133,834 172,600 16.65% 17.0% Any product and services 78,219 95,745 63,119 67,221 62,801 6.06% -5.3% Wheat Product 57,956 60,235 66,929 64,566 61,455 5.93% 1.5% 10.5 Tobacco 43,930 49,102 51,608 63,555 65,586 6.33% % Long term goods 37,863 34,565 47,800 44,974 54,005 5.21% 9.3% Fish 28,356 31,849 32,041 33,620 40,478 3.91% 9.3% Education 27,875 30,408 29,926 32,278 35,358 3.41% 6.1% Vegetable 31,158 30,068 27,365 34,505 42,397 4.09% 8.0% Health care 24,169 25,520 21,392 22,699 27,006 2.61% 2.8% Dairy product 21,540 23,923 26,616 28,025 29,357 2.83% 8.0% Fruit 16,379 19,243 20,174 19,268 22,850 2.20% 8.7% Meat 13,252 14,980 18,048 20,526 24,987 2.41% 17.2% Cloth 14,527 14,818 25,378 28,869 31,187 3.01% 21.0% VAT and Insurance 11,758 13,840 18,981 21,580 30,320 2.93% 26.7% 10.2 Grand Total 703,561 776,032 868,823 946,256 1,036,497 91.66% % Source: Indonesia Statistic Bureau
% of household expenditure per month Indonesia cigarettes price vs other countries (US$) 35% 32.7% 18 30% 16
25% 14 20% 12 15% 12.4% 11.6% 10% 10 8.0% 7.7% 5.6% 4.7% 4.3% 5% 3.2% 8 2.6% 2.1% 2.1% 1.8% 1.1%
0% 6
Fish
Fruit
Meat
Tuber
Spices Legumes
Tobacco 4
Beverages
Vegetables
Oil and fats and Oil
Dairy Product Dairy
Wheat Product Wheat Other Products Other 2
Prepared food & beverages & food Prepared 0 New Singapore United Hong Kong United China Malaysia Russia Japan Indonesia Zealand Kingdom States Average Source: Indonesia Statistic Bureau Source: Numbeo
Page 12
Industry Focus Indonesia Tobacco
Indonesia tobacco tax system
The cigarette industry has played an important role in the At the end of the roadmap timeline, the government will country’s macro and micro economic growth. The industry remove distinguishing features between SPM and SKM, with the creates jobs because it is very labour intensive and has absorbed different layers according to the size of the manufacturers. hundreds of thousands of jobs on the field including farmers, Companies with strong financial fundamentals and well- advertising agencies, kiosks, etc. It is hard to ignore the fact that established brand will benefit. The effect of the reduced layers Indonesia’s cigarette tax has been contributing c.8% to the will directly impact the size of the cigarette industry. In 2012, government’s annual budget. The high tax on cigarettes and there were 1,000 cigarette manufacturers. In 2017, the industry huge demand for cigarettes are reflected on the national shrank to 487 manufacturers. The regulation will indirectly income. Almost 75% of the cost of making cigarettes is the affect the volume of the cigarette industry but opportunities will taxes. Indonesia’s cigarette taxes consist of 2 components: also emerge for companies to increase their market share. Excise tax and value-added tax (VAT). Less layers reduce the number of producer
Tax revenue (Rpbn) 3,500 20
2,000.0 10.00%
1,800.0 9.00% 18 3,000 1,600.0 8.00% 16 1,400.0 7.00%
1,200.0 6.00% 2,500 14
1,000.0 5.00%
800.0 4.00% 12 2,000 600.0 3.00% 10 400.0 2.00%
200.0 1.00% 1,500 8 0.0 0.00% 2013 2014 2015 2016 2017 6 Total Input % of Nation Input 1,000 4 Source: Ministry of Finance 500 2 The amount of excise tax depends on the type of cigarette and 0 0 production capacity of the manufacturer. On average, each year 2009 2010 2011 2012 2013 2014 2015 2016 2017 there is 9-10% hike on tobacco excise tax. Machine rolled (SKM) Number of Producer (LHS) Number of Layers (RHS) and white cigarettes (SPM) are affected the most by the latest government regulations. The second component is the VAT Source: Ministry of Finance which is only applied at the producer level. According to the latest regulations, the VAT rate is 9.1%. The cigarette industry is double-edged sword. On one hand, cigarette excise tax is a source of revenue for the government. The government is trying to simplify the layers on the cigarette On the other hand, cigarettes pose health issues. More than excise tax. The roadmap will be from 2017 to 2021. Every year, 200,000 people die annually because of tobacco-caused disease layers will be reduced, from 12 layers in 2017 to 5 layers in (tobacco atlas). The government is also trying to mitigate health 2021. The government hopes that the more delicate tax layers risks of cigarettes by with high taxes. It also ratified the will eliminate illegal cigarettes. The government plans to merge PP/No.109/2012 regulation to limit cigarette promotions and SKM IIA and SKM IIB in 2018. SKM IIA consists of large scale consumption. There are 4 main points: manufacturers compared to SKM IIB. This will increase - Outer packaging of cigarettes (both front and back) competition for smaller scale production. If consumers choose to has to display pictorial and text health warnings. switch to other brands, it will hurt the sales of one - Restricted places and areas for cigarette advertising. manufacturer. - Cigarette advertising in broadcast media can only be aired between 21:30 – 5:00. - Restricted smoking areas in public spaces.
Page 13
Industry Focus Indonesia Tobacco
Alternative advertising channel Soundrenaline, an annual music event held in Bali sponsored by Sampoerna and We The Fest sponsored by Gudang Heavy restrictions on promoting cigarettes through Garam. Sales promoters are permitted to engage in direct conventional media have forced cigarette companies to be selling to customers, which could potentially increase brand more creative in advertising their products. Cigarette awareness of products. Promotions through these channels companies usually try to increase brand awareness by are more efficient because young smokers usually have the penetrating the youth market. Events such as music or sports tendency to switch cigarettes before eventually sticking to events are attractive to youths and are often used by one brand. cigarette companies to promote their products. Examples are
Indonesia tax layer system Cigarette Price Producation Capacity (in Bn Type Group 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 (in Rp) St icks) 290 310 325 355 375 375 415 480 530 590 I 1,120 > 3bn 280 300 315 345 355 355 260 280 295 325 SKM 895 210 230 245 270 285 285 305 340 365 385 II less than 3bn 175 195 210 715-895 235 245 245 265 300 335 370 135 155 170 290 310 325 365 380 380 425 495 555 625 I 1,130 > 3bn 230 275 295 185 225 245 SPM 935 170 200 215 235 245 245 270 305 330 370 II less than 3bn 135 165 175 190 640-935 195 195 220 255 290 355 80 105 110 125 1,260 200 215 235 255 275 275 290 320 345 365 I > 2bn 150 165 180 890-1260 195 205 205 220 245 265 290 130 145 155 90 105 110 125 130 130 140 155 165 180 SKT atau SPT II 470 Less than 2bn but more than 500mn 80 95 100 115 120 120 125 140 155 75 90 90 105 110 110 Less than 500mn 85 90 100 100 III 400 40 65 65 75 80 80 80 80 80 More than Rp 660 290 310 325 355 375 375 I Rp 630 - Rp 660 280 300 315 345 415 480 530 355 355 Rp 600 - Rp 630 260 280 295 325 SKTF / SPTF More than Rp 430 210 230 245 270 285 285 305 340 365 Rp 380 - Rp 430 175 195 210 235 245 245 265 300 335 II Rp 374 - Rp 380 135 155 170 Number of Layers 19 19 19 15 13 13 12 12 12 10 Source: Ministry of Finance
Page 14
Industry Focus Indonesia Tobacco
Indonesia regional minimum wage (UMR) – Rp/month Regional minimum wage (Rp/month) Provins i 2012 2013 2014 2015 2016 2017 2018
ACEH 1,400,000 1,550,000 1,750,000 1,900,000 2,118,500 2,500,000 2,717,750 SUMATERA UTARA 1,200,000 1,375,000 1,505,850 1,625,000 1,811,875 1,961,354 2,132,188 SUMATERA BARAT 1,150,000 1,350,000 1,490,000 1,615,000 1,800,725 1,949,284 2,119,067 RIAU 1,238,000 1,400,000 1,700,000 1,878,000 2,095,000 2,266,722 2,464,154 JAMBI 1,142,500 1,300,000 1,502,300 1,710,000 1,906,650 2,063,000 2,243,718 SUMATERA SELATAN 1,195,220 1,630,000 1,825,000 1,974,346 2,206,000 2,388,000 2,595,995 BENGKULU 930,000 1,200,000 1,350,000 1,500,000 1,605,000 1,737,412 1,888,741 LAMPUNG 975,000 1,150,000 1,399,037 1,581,000 1,763,000 1,908,447 2,074,673 KEP. BANGKA BELITUNG 1,110,000 1,265,000 1,640,000 2,100,000 2,341,500 2,538,673 2,755,443 KEP. RIAU 1,015,000 1,365,087 1,665,000 1,954,000 2,178,710 2,538,454 2,563,875 DKI JAKARTA 1,529,150 2,200,000 2,441,000 2,700,000 3,100,000 3,355,750 3,648,035 JAWA BARAT 780,000 850,000 1,000,000 1,000,000 1,312,355 1,420,624 1,544,360 JAWA TENGAH 765,000 830,000 910,000 910,000 1,265,000 1,367,000 1,486,065 DI YOGYAKARTA 892,660 947,114 988,500 988,500 1,237,700 1,337,645 1,454,154 JAWA TIMUR 745,000 866,250 1,000,000 1,000,000 1,283,000 1,388,000 1,508,894 BANTEN 1,042,000 1,170,000 1,325,000 1,600,000 1,784,000 1,931,840 2,099,385 BALI 967,500 1,181,000 1,542,600 1,621,172 1,807,600 1,956,727 2,127,157 NUSA TENGGARA BARAT 1,000,000 1,100,000 1,210,000 1,330,000 1,482,950 1,631,245 1,825,000 NUSA TENGGARA TIMUR 925,000 1,010,000 1,150,000 1,250,000 1,425,000 1,525,000 1,660,000 KALIMANTAN BARAT 900,000 1,060,000 1,380,000 1,560,000 1,739,400 1,882,900 2,046,900 KALIMANTAN TENGAH 1,327,459 1,553,127 1,723,970 1,896,367 2,057,558 2,227,307 2,421,305 KALIMANTAN SELATAN 1,225,000 1,337,500 1,620,000 1,870,000 2,085,050 2,258,000 2,454,671 KALIMANTAN TIMUR 1,177,000 1,752,073 1,886,315 2,026,126 2,161,253 2,354,800 2,543,331 KALIMANTAN UTARA - - - 2,026,126 2,175,340 2,358,800 2,559,903 SULAWESI UTARA 1,250,000 1,550,000 1,900,000 2,150,000 2,400,000 2,598,000 2,824,286 SULAWESI TENGAH 885,000 995,000 1,250,000 1,500,000 1,670,000 1,807,775 1,965,232 SULAWESI SELATAN 1,200,000 1,440,000 1,800,000 2,000,000 2,250,000 2,435,625 2,647,767 SULAWESI TENGGARA 1,032,300 1,125,207 1,400,000 1,652,000 1,850,000 2,002,625 2,177,052 GORONTALO 837,500 1,175,000 1,325,000 1,600,000 1,875,000 2,030,000 2,206,813 SULAWESI BARAT 1,127,000 1,165,000 1,400,000 1,655,500 1,864,000 2,017,780 2,193,530 MALUKU 975,000 1,275,000 1,415,000 1,650,000 1,775,000 1,925,000 2,222,220 MALUKU UTARA 960,498 1,200,622 1,440,746 1,577,617 1,681,266 1,975,000 2,320,803 PAPUA BARAT 1,450,000 1,720,000 1,870,000 2,015,000 2,237,000 2,421,500 2,667,000 PAPUA 1,585,000 1,710,000 2,040,000 2,193,000 2,435,000 2,663,646 2,895,650
INDONESIA 1,088,903 1,296,908 1,584,391 1,790,342 1,997,819 2,080,116 2,266,327 10% 19% 22% 13% 12% 4% 9% Source: Ministry of Finance
Page 15
Industry Focus Indonesia Tobacco
Company Profiles
Page 16
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. FY Dec (Rpbn) 2017A 2018F 2019F 2020F GGRM is the biggest beneficiary, in our view. We estimate Revenue 83,306 90,706 101,307 110,599 EBITDA 13,481 12,787 16,583 17,490 GGRM’s market share to improve to 26.9% in FY19F from 24.5% Pre-tax Profit 10,437 10,423 13,903 14,719 in FY17 – as we assume market share gains in the SKM FF Net Profit 7,754 7,744 10,329 10,936 segment. We prefer companies with more exposure and products Net Pft (Pre Ex.) 7,754 7,744 10,329 10,936 EPS (Rp) 4,030 4,025 5,368 5,684 in the mid- to low-income segment in 2019 and we believe GGRM EPS Pre Ex. (Rp) 4,030 4,025 5,368 5,684 will be in a good position to benefit due to its strong market share EPS Gth (%) 16 0 33 6 in the SKM FF segment. We expect GGRM's revenue and earnings EPS Gth Pre Ex (%) 16 0 33 6 to grow by 11.7%/33.4% in FY19F driven by SKM FF volume. Diluted EPS (Rp) 4,030 4,025 5,368 5,684 Net DPS (Rp) 2,600 2,418 2,415 3,221 Valuation: BV Per Share (Rp) 21,917 23,524 26,478 28,940 PE (X) 20.9 20.9 15.7 14.8 Our DCF-based TP of Rp94,700 for GGRM assumes a WACC of PE Pre Ex. (X) 20.9 20.9 15.7 14.8 10.3% and terminal growth of 4%. P/Cash Flow (X) 19.8 21.6 15.4 15.0 EV/EBITDA (X) 13.4 14.1 10.7 10.0 Key Risks to Our View: Net Div Yield (%) 3.1 2.9 2.9 3.8 Key downside risks are: (i) weaker-than-expected cigarette P/Book Value (X) 3.8 3.6 3.2 2.9 volume growth in FY19F, (ii) changes in excise tax, (iii) slower- Net Debt/Equity (X) 0.4 0.4 0.3 0.2 than-expected selling price increase, (iv) higher-than-expected ROAE (%) 19.0 17.7 21.5 20.5 capex for airport development, and (v) loss in market share. Consensus EPS (Rp): 4,313 4,911 5,446
Other Broker Recs: B: 25 S: 2 H: 1 At A Glance
Issued Capital (m shrs) 1,924 ICB Industry : Consumer Goods ICB Sector: Tobacco Mkt. Cap (Rpbn/US$m) 162,201 / 11,455 Principal Business: PT Gudang Garam Tbk is an Indonesian company Major Shareholders (%) engaged in the manufacturing of cigarettes. The company is a Suryaduta Investama (%) 69.3 leading manufacturer of kretek cigarettes (these clove-type of Suryamitra Kusuma (%) 6.3 cigarettes are a trademark of Indonesia). It produces a wide range Free Float (%) 24.4 of kretek ciga 3m Avg. Daily Val (US$m) 5.9 Source of all data on this page: Company, DBSVI, Bloomberg
ed: TH/ sa: MA, CW, CS
Company Focus Gudang Garam
Table of Contents
SWOT Analysis ...... 2
Investment Thesis ...... 3
Key Assumption ...... 5
Gudang Garam Products...... 6
Company Background ...... 7
Key Management Team ...... 8
Competitive Strengths ...... 9
Growth Strategies ...... 9
Key Risks ...... 9
Critical Data Points To Watch ...... 10
Income Statement ...... 13
Quarterly Income Statement ...... 14
Balance Sheet ...... 15
Cash Flow Statement ...... 16
Valuation ...... 17
Page 18
Company Focus Gudang Garam
SWOT Analysis
Strengths Weakness Gudang Garam (GGRM) strongly dominates the SKM FF Transactions related to its non-core business, such as segment, which keeps on winning back its market share in buying land for building an airport in Kediri from related Indonesia. parties could raise a corporate governance issue. GGRM is the second largest player with significant pricing Potential lower dividend payout ratio in FY19F. power.
Opportunities Threats Upcoming Presidential Election, government aid, low Unfavourable government policies on the cigarette excise inflation, reversal of oil prices, and no change in electricity tariff tax, promotion and advertising of the product, and public in FY19F should boost the private consumption and should space for smoking. benefit cigarette volume. Unfavourable government policies that may decrease No change in cigarette excise tax would be a great news as purchasing power. it means that the cigarette companies do not have to raise their retail prices.
Source: DBSVI
Page 19
Company Focus Gudang Garam
Investment Thesis
Key catalyst: Potential high demand for SKM FF and Estimate revenue to grow at 11.7%/9.2% in FY19F/20F. estimate a strong earnings improvement from stable excise As of 9M18, GGRM had posted an improvement in revenue tax. We think things should turn brighter this year for growth which was mostly driven by higher volume growth (as consumption, albeit at a gradual pace. There are a few we view that GGRM has taken some market share from peers favourable factors: (i) the upcoming presidential election, by not increasing ASP as high as peers). Going forward, we government aid, (ii) low inflation, (iii) reversal of oil prices, forecast GGRM to post 11.7% revenue growth in FY19F on and (iv) no change in electricity tariff. We believe that these the back of (i) better industry volume growth from higher factors will be positive for consumption trend across the affordability (as there is no excise tax hike), (ii) as we foresee consumer products. a better consumption power in low- to mid-income level, we see GGRM as the biggest beneficiary next year and thus In our view, the gradual improvement in consumption boost the volume growth in FY19F. We assume a 5.3%/4% purchasing power, especially in low- to mid-level income volume growth in FY19F/20F, driven mostly from SKM FF groups, would improve demand for higher tar cigarettes in segment. Meanwhile, we also assume ASP to increase by the SKM FF segment (which is more favoured by the low- to 6%/5% in FY19F/20F in the SKM segment and assume mid-income groups) rather than SPM or SKM LTN (low tar 5%/4% ASP hike in FY19F/20F in the SKT segment. nicotine) which normally targets the mid- to upper-income groups. No excise tax = strong earnings improvement in FY19F. We estimate GGRM to post a strong earnings growth of The government's decision to not increase the excise tax in 33.4% y-o-y in FY19F – as there is no excise tax hike. Based FY19F will benefit the cigarette industry from (i) improvement on our calculation, every 10% hike in excise tax on SKM will in affordability which translate into potentially higher volume impact net earnings negatively by 35%. We estimate that growth, and (ii) improvement in the earnings for the cigarette every 10% hike in excise tax on SKT will impact net earnings company due to lower cost (as excise contributed 70% to the negatively by 6%. total cost of sales). Strong fundamentals should offset the overhang on Machine-made full-flavoured clove cigarettes (SKM FF) as airport. GGRM’s recent plan of land acquisition worth the winner, and GGRM will be the biggest beneficiary. As Rp850bn with a total area of 2.68m2 to construct an airport in GGRM’s product mix is still dominated by machine-made Kediri could pose a risk to (i) the dividend payout ratio, and (SKM) full-flavoured cigarettes, we believe the company is (ii) corporate governance issue. In our model, we assume well positioned to embrace the growing machine-made full- Rp8tr of airport capex through FY21F and also lower our flavoured segment; its well-received brand image among dividend payout ratio to 60% for FY19F. smokers should support its growth agenda. According to Nielsen, the industry’s machine-made (SKM) FF market share Potential impact from index weighting adjustment. The had grown from 28% in 2012 to 34.9% in 2017. Indeed, adjustment in the free float to LQ45 and IDX30 indexes will GGRM saw an increase in its SKM FF volume contribution. potentially have an impact on GGRM weights, but it would be less severe than HMSP. Currently, GGRM is trading at GGRM revenue contribution (%) 15.7x FY19F PE which is comparable with the global tobacco 100% players and overall JCI.
95%
90%
85%
80%
75% 2009 2010 2011 2012 2013 2014 2015 2016 2017
Others Paperboard Klobot clove cigarettes Hand-rolled clove cigarettes ( SKT )
Machine-made clove cigarettes ( SKM ) Source: Company Nb. SKM revenue contribution consists of SKM FF revenue and SKM LTN revenue
Page 20
Company Focus Gudang Garam
Key assumption
GGRM volume (in bn stick) 2017 2018F 2019F 2020F SKT 8.6 8.7 8.8 8.9 SKM FF 61.7 65.4 70.0 73.5 SKM LTN 8.4 7.6 7.3 7.1
GGRM ASP (Rp/stick) 2017 2018F 2019F 2020F SKM ASP 1,067.0 1,120.4 1,187.6 1,247.0 SKT ASP 844.1 886.3 936.9 974.3 Excise tax (Rp/stick) - SKM 530.0 590.0 590.0 645.0 Excise tax (Rp/stick) - SKT 345.0 370.0 370.0 395.0
Source: Company, DBSVI estimate
LQ45 index weighting now and after changes (DBS forecast) Ticker Name Weight Shares Price Free Float % post LO45 BBCA IJ Equity Bank Central Asia Tbk PT 13.66 24,408.46 24,100.00 43.06 16.6% 2.99% HMSP IJ Equity Hanjaya Mandala Sampoerna Tbk PT 10.29 116,318.08 3,810.00 7.50 2.2% -8.11% BBRI IJ Equity Bank Rakyat Indonesia Persero Tbk PT 9.56 122,112.35 3,370.00 43.25 11.7% 2.14% TLKM IJ Equity Telekomunikasi Indonesia Persero Tbk PT 9.09 99,062.22 3,950.00 47.90 12.3% 3.23% BMRI IJ Equity Bank Mandiri Persero Tbk PT 7.89 46,200.00 7,350.00 39.99 8.9% 1.04% ASII IJ Equity Astra International Tbk PT 7.74 40,483.55 8,225.00 49.84 10.9% 3.17% UNVR IJ Equity Unilever Indonesia Tbk PT 7.48 7,630.00 42,200.00 15.01 3.2% -4.30% GGRM IJ Equity Gudang Garam Tbk PT 3.56 1,924.09 79,550.00 23.78 2.4% -1.16% BBNI IJ Equity Bank Negara Indonesia Persero Tbk PT 3.35 18,462.17 7,800.00 41.16 3.9% 0.55% UNTR IJ Equity United Tractors Tbk PT 2.94 3,730.14 33,975.00 40.46 3.4% 0.43% ELSA IJ Equity Elnusa Tbk PT 0.06 7,298.50 364.00 44.00 0.1% 0.02% Source: Bloomberg Finance LP., DBSVI estimate
IDX30 index weighting now and after changes (DBS forecast) Ticker Name Shares Price Free Float % Post IDX30 BBCA IJ Equity Bank Central Asia Tbk PT 24,408.46 24,100.00 43.06 17.5% 2.85% HMSP IJ Equity Hanjaya Mandala Sampoerna Tbk PT 116,318.08 3,810.00 7.50 2.3% -8.75% BBRI IJ Equity Bank Rakyat Indonesia Persero Tbk PT 122,112.35 3,370.00 43.25 12.3% 2.04% TLKM IJ Equity Telekomunikasi Indonesia Persero Tbk PT 99,062.22 3,950.00 47.90 13.0% 3.20% BMRI IJ Equity Bank Mandiri Persero Tbk PT 46,200.00 7,350.00 39.99 9.4% 0.92% ASII IJ Equity Astra International Tbk PT 40,483.55 8,225.00 49.84 11.5% 3.17% UNVR IJ Equity Unilever Indonesia Tbk PT 7,630.00 42,200.00 15.01 3.3% -4.69% GGRM IJ Equity Gudang Garam Tbk PT 1,924.09 79,550.00 23.78 2.5% -1.30% BBNI IJ Equity Bank Negara Indonesia Persero Tbk PT 18,462.17 7,800.00 41.16 4.1% 0.51% UNTR IJ Equity United Tractors Tbk PT 3,730.14 33,975.00 40.46 3.5% 0.39% Source: Bloomberg Finance LP., DBSVI estimate
Page 21
Company Focus Gudang Garam
Gudang Garam products
SKT Sigaret Kretek Tangan Gudang Garam Merah Gudang Garam Djaja Gudang Garam Gold Syahrini Taman Sriwedari Gudang Garam Special Deluxe Gudang Garam Tanda Mata Gudang Garam Halim Gudang Garam Halim Brown Gudang Garam Mini Filter Gudang Garam King Size Nusa
No 1 in SKM FF SKM FF Sigaret Kretek Mesin Full Flavor Gudang Garam International Surya Professional Surya Exclusive Surya 12 Premium Surya 12 Surya 16 Surya 20 Surya 50 Gudang Garam Signature Gudang Garam Signature Menthol Gudang Garam Menthol Gudang Garam Nusantara Gudang Garam Nusantara Menthol
Sampoerna A Mild is the leader SKM LT GG Mild GG Mild Shiver Surya Mild Surya Mild Menthol Surya Professional Mild Gudang Garam Deluxe Mild Gudang Garam Deluxe Menthol Gudang Garam Mild Deluxe Menthol Gudang Garam Signature Mild Gudang Garam Signature Mild Menthol Surya Slim Surya Slim Menthol Surya Slim White Source: Company
Page 22
Company Focus Gudang Garam
Company Background
Corporate History. GGRM was initially founded by Surya cigarette market at the end of 2017. GGRM operates Wonowidjojo in Kediri, East Java in 1958. The company is a production facilities at two main sites, each with its own leading producer of Kretek cigarettes, the clove cigarettes primary and secondary kretek manufacturing operations. synonymous with Indonesia and the dominant cigarette GGRM produces a wide range of kretek cigarettes including category, drawing on its unique reputation as a major centre low tar nicotine variants, widely known as light and mild, as of the spice trade. Based on Nielsen market research, the well as traditional hand-rolled kretek. The well-known company had a market share of 21.4% of the domestic products include GG International, and GG Surya.
Sales Trend Profitability Trend Rp bn Rp bn 15,677 20.0% 100,000 18.0% 14,677 16.0% 13,677 80,000 14.0% 12,677 12.0% 60,000 11,677 10.0% 8.0% 10,677 40,000 6.0% 9,677 20,000 4.0% 8,677 2.0% 7,677 0 0.0% 2016A 2017A 2018F 2019F 2020F 6,677 2016A 2017A 2018F 2019F 2020F
Total Revenue Revenue Growth (%) (YoY) Operating EBIT Pre tax Profit Net Profit
Source: Company, DBSVI
Page 23
Company Focus Gudang Garam
Key Management Team
Name Pos ition Susilo Wonowidjojo President Director Mr Susilo Wonowidjojo was appointed as President Director in June 2009. Formerly served as Vice President Director since 1990 and before that as Director since 1976 with responsibilities for procurement of raw materials, flavours, inventory, and production management. He is related to Juni Setiawati Wonowidjojo, President Commisioner and is affiliated to the company's shareholders.
Heru Budiman Director Mr Heru Budiman was appointed as Director in 2000. He joined the company in 1990 with responsibility for Treasury and Investor Relations. His background includes senior management positions with International and Leading National Banks. He holds a Bachelor Degree in English from Satya Wacana University.
Herry Susianto Director Mr Herry Susianto was appointed as Director with responsibility for Finance in 2007. His previous position was internal audit head, a role he filled between 2002-2007. He holds a degree in Law from Airlangga University and Masters in Management from Gajayana University.
Buana Susilo Director Mr Buana Susilo was appointed Director in 2008 with responsibilyty in manufacturing technology. He draws upon extensive experience with the company in equipment design, process planning, and configuration. Previously, he served as Deputy Director since 1991 and in early 2000 was in charge of the greenfield construction and development on the second manufacturing facility at Gempol.
Istata Taswin Siddharta Director Mr Istata Taswin Siddharta was appointed as Director in 2012 with major responsibility for Information Technology. He joined the company in 2008 and served as Deputy Marketing Director from 2008-2010. He formerly served as Partner of KPMG Indonesia and has extensive experience as a public accountant for 20 years. He holds a Bachelor's Degree in Accounting from University of Indonesia.
Sony Sasono Rahmadi Independent Director Mr Sony Sasono Rahmadi was appointed as Independent Director In 2012. From 2008-2012, he served as Director at PT Cipta Kretek Nusantara and PT Karyadibya Mahardika. He holds a Bachelor's Degree in Chemical Engineering from The Institute of Technology, Sepuluh Nopember.
Lengga Nurullah Director Ms Lengga Nurullah was appointed as Director in 2015 with responsibility for SKM production at Kediri. Formerly served as Deputy Director for production at Gempol 2015-2015. She joined the company in 2012 and previously worked in automotive manufacturing with Bosch in Germany. She graduated from Technical University of Berlin.
Source: Company
Page 24
Company Focus Gudang Garam
Competitive Strengths
Potentially higher demand in SKM FF segment. While we category, which has and will continue to attract new assume a recovery in domestic volume growth in FY19F on competitors seeking a share of Indonesia’s substantial market the back of, (i) higher consumer purchasing power during the potential. upcoming Presidential Election which may improve consumption in rural areas, and (ii) potential low price Another factor that supports cigarette consumption in adjustments in FY19F in the absence of an excise tax hike, Indonesia is that citizens have easy access to cigarettes, not which could improve affordability. In our view, the gradual just because of the wide distribution network that makes improvement in consumption purchasing power, especially in cigarettes available in all corners of the archipelago but also low- to mid-level income groups, would improve demand for because of the relatively low price that is charged for a higher-tar cigarettes in the SKM FF segment (which is more package of cigarettes. Nowhere on earth is a pack of favoured by the low- to mid-income groups) rather than SPM cigarettes as cheap as in Indonesia. On average, a pack costs or SKM LTN (low tar nicotine) which normally targets the US$1.3 a piece in Indonesia. mid- to upper-income groups. Key Risks …theoretically, the Presidential Election will drive cigarette volume, especially for SKM FF, in FY19F. We see the Thoughts that the Indonesia government will increase possibility of higher consumption spending in rural areas the excise tax again in FY20F. This year, Indonesia's before the Presidential Election, especially on SKM FF government confirmed that they will not increase the excise products. Looking back at the last Presidential Election in tax on cigarettes in 2019. As a result, it should give some 2014, SKM FF volume increased significantly compared to fresh air to the cigarette industry and we estimate that the other product segments. In our view, this was due to: industry volume could improve in FY19F. This potentially - Indonesians’ preference for kretek (clove) cigarettes, disrupts the revenue from excise tax for next year as the especially SKM FF or hand-rolled cigarettes (SKT). government had previously decided to increase APBN 2019 - Pricing of kretek cigarettes is cheaper vs white cigarettes tobacco excise tax for 2019F by 7.15% to Rp158.8tr (2018F: due to lower excise tax. Rp148.2tr). The government has also decided to delay the - Kretek cigarettes have higher tar vs white cigarettes, simplification. With the current simplification, mid to low resulting in longer smoking time. cigarette manufacturers will remain to fight against bigger players. As of October 2018, excise tax reached Rp106tr Strong market share in full-flavoured (FF) cigarettes. (+9.8% y-o-y) with 95% coming from tobacco excise tax. We GGRM mostly produces machine-made cigarettes (SKM) full see a potentially higher excise tax in FY20F post the flat excise flavoured (FF) cigarettes which contributed to around 78% of in FY19F; as the government still requires to collect tax from the company’s sales volume in 2017. Through its key brands, the cigarette industry and it would have an impact on the (i) Surya 16 and GG international – GGRM is the market leader cigarette industry volume which is likely to decline in FY20F, in the SKM FF segment (c. 18% market share in the industry). and (ii) lower earnings growth from the cigarette players in Overall, GGRM has a 24.5% market share in the industry as FY20F. of 2017. Sensitivity analysis on excise tax to GGRM earnings. Growth Strategies Based on our calculation, every 10% hike in excise tax on SKM will impact net earnings negatively by 35%. We Consistent product quality and relentless efforts in estimate that every 10% hike in excise tax on SKT will impact marketing and distribution would play a vital part in net earnings negatively by 6%. contributing to both volume and revenue growth for GGRM. The consistency of product quality would enable the Airport investment at Kediri airport remains at risk. company’s products to sustain market presence. GGRM’s recent plan of land acquisition worth Rp850bn with 2 a total area of 2.68m to construct an airport in Kediri could Aggressive advertising and promotion. GGRM’s pose a risk to the dividend payout ratio, in our view. We see advertising and promotion programmes continued to build dividend payout ratio being downgraded to 60% in FY19F (vs and maintain brand presence in a hotly contested consumer more than 75% in the past).
Page 25
Company Focus Gudang Garam
CRITICAL DATA POINTS TO WATCH SKM FF Volume
73.5 74.2 70 Critical Factors 65.4 61.7 63.6 58.7 Cigarette excise tax. The most negative impact is from the Indonesian 53.0 government’s tendency to raise excise tax rates on tobacco products 42.4 at the start of the year. This is to collect tax revenue as well as to 31.8 discourage the consumption of cigarettes (the higher excise should 21.2 lead to higher retail prices). The higher excise tax could lead to a 10.6 higher retail price of cigarettes which would result in a soft cigarette 0.0 2016A 2017A 2018F 2019F 2020F industry volume growth.
SKM LTN Volume Indonesia consumer purchasing power. In the past, regional 9.9 minimum wage (UMR) growth outpaced excise tax growth, leading 10.1 8.4 to better volume growth of the cigarette industry, due to the two 8.1 7.56 7.26 7.11 main reasons: - Most smokers in Indonesia are in the low- to mid-income 6.1
groups, which are more sensitive towards selling price 4.0 movements. - Higher UMR growth enables the low- to mid-income groups 2.0
to have higher disposable income. 0.0 2016A 2017A 2018F 2019F 2020F
However, the situation has changed in the past three years. Excise tax SKT Volume growth has outpaced UMR growth, resulting in a softening of 8.79 8.88 purchasing power in the low- to mid-income groups. This has caused 9.06 8.46 8.62 8.71 cigarette volume to decline to single-digit growth. 7.25
ASP increase to maintain the margin. Normally, in the event of higher 5.43 excise tax; the cigarette companies will increase their ASPs to pass on 3.62 the higher excise. The slower-than-expected of the company to pass on the ASP will have an impact on its gross profit margin. 1.81
0.00 2016A 2017A 2018F 2019F 2020F SKM Excise
821 829.3 758 761 680 663.4 615
497.6
331.7
165.9
0.0 2016A 2017A 2018F 2019F 2020F
SKT Excise
552 557.2 522 524 494
445.8 420
334.3
222.9
111.4
0.0 2016A 2017A 2018F 2019F 2020F
Source: Company, DBSVI
Page 26
Company Focus Gudang Garam
Balance Sheet: Leverage & Asset Turnover (x) ROE is on the rise. In 2017, GGRM recorded an ROE of 19% and we 1.5 0.50 estimate the ROE in FY18F to be at 17.7% on the back of lower 1.5 0.40 earnings assumption in FY18F – as the industry volume remained 1.4 quite soft in FY18F which resulted in a softer growth in volume and 0.30 1.4 inability to increase the ASP higher. Meanwhile, we estimate an 0.20 increase of ROE in FY19F to 21.5% on the back of strong 1.3 improvement in earnings as the excise tax will be flat in FY19F. 0.10 1.3 Airport investment could have an impact on lower dividend, in our 0.00 1.2 view. The recent plan from GGRM to build the airport in Kediri and 2016A 2017A 2018F 2019F 2020F with the cost of construction potentially reaching between Rp8-10tr Gross Debt to Equity (LHS) Asset Turnover (RHS) over 3-5 years' time horizons would have an impact on lowering the Capital Expenditure company's dividend payout ratio (DPR). We forecast a DPR of 60% in Rp bn 3,500.0 FY19F from above 75% in the past. 3,000.0
2,500.0
Share Price Drivers: 2,000.0
No excise tax in FY19F. After three years of negative growth in the 1,500.0
Indonesia cigarette volume; we expect a better volume growth this 1,000.0 year as there will be no changes in excise tax in FY19F which should 500.0 translate into an improvement in the volume growth due to better 0.0 affordability. 2016A 2017A 2018F 2019F 2020F Capital Expenditure (-)
Key Risks: ROE (%)
Excise tax hike. A higher-than-expected excise tax hike may affect (i) 20.0% the industry volume, and (ii) the company’s earnings going forward; especially if coupled with a weak economic environment. 15.0% Regulatory issues. The regulatory issues may include (i) packaging requirements, and (ii) advertisement bans. 10.0% Raw material prices. The biggest raw materials are (i) tobacco, and (ii) cloves which are sourced locally. The price movement of both raw 5.0% materials could pose an impact to the company’s GPM. Note that the 0.0% impact would be minimal and has some lag time given that the 2016A 2017A 2018F 2019F 2020F cigarette companies have ample inventories to provide buffer against immediate impact on swings in raw material prices. Forward PE Band (x) (x) Shift in consumer preference. As Indonesia's cigarette industry is 17.0 dominated by kretek-based products, if the consumer preference 15.0 changes, it would be detrimental to the current product portfolio. +2sd: 20x Healthier lifestyle. As people are moving towards a healthier lifestyle, 13.0 +1sd: 17x we think that more people would reduce their smoking habit, thus 11.0 Avg: 9.5x leaving the industry at a sunset stage. 9.0
-1sd: 10.9x 7.0
Company Background -2sd: 7.8x 5.0 PT Gudang Garam Tbk is an Indonesian company engaged in the Jan-15 Jan-16 Jan-17 Jan-18 Jan-19 manufacture of cigarettes. The company is a leading manufacturer of kretek cigarettes (these clove-type cigarettes are a trademark of PB Band (x) (x) Indonesia). It produces a wide range of kretek cigarettes including 3.7 low-tar, low-nicotine variants, and traditional hand-rolled kretek, which are distributed domestically and worldwide. The company 3.2 +2sd: 20x markets its products under the Gudang Garam family, Surya family, 2.7 +1sd: 17x and GG family brand names. The company was formerly known as 2.2 Avg: 1.84x PT Perusahaan Rokok Tjap "Gudang Garam" Kediri. PT Gudang 1.7 Garam Tbk was founded in 1958 and is headquartered in Kediri, -1sd: 10.9x 1.2 Indonesia. PT Gudang Garam Tbk is a subsidiary of PT Suryaduta -2sd: 7.8x 0.7 Investama. Jan-15 Jan-16 Jan-17 Jan-18 Jan-19
Source: Company, DBSVI
Page 27
Company Focus Gudang Garam
Segmental Breakdown FY Dec 2017A 2018F 2019F 2020F
Revenues (Rpbn) Machine-made clove cigarettes ( SKM ) 74,853 81,745 91,728 100,496
Hand-rolled clove cigarettes ( SKT ) 7,276 7,716 8,237 8,652 Klobot clove cigarettes 36.0 36.0 35.0 35.0 Paperboard 990 1,089 1,198 1,318
Others 151 121 109 98.0 Total 83,306 90,706 101,307 110,599
Revenue (Rpbn) Machine-made clove cigarettes ( SKM ) 74,853 81,745 91,728 100,496 Hand-rolled clove cigarettes ( SKT ) 7,276 7,716 8,237 8,652
Klobot clove cigarettes 36.0 36.0 35.0 35.0 Paperboard 990 1,089 1,198 1,318
Others 151 121 109 98.0 Total 83,306 90,706 101,307 110,599
Source: Company, DBSVI
Page 28
Company Focus Gudang Garam
Income Statement (Rpbn) Margins Trend FY Dec 2015A 2016A 2017A 2018F 2019F 2020F 16.0% 15.0% Revenue 70,366 76,274 83,306 90,706 101,307 110,599 14.0% Cost of Goods Sold (54,880) (59,657) (65,084) (72,388) (78,670) (86,663) 13.0% Gross Profit 15,486 16,617 18,222 18,319 22,636 23,936 12.0% 11.0% Other Opng (Exp)/Inc (5,493) (6,497) (6,970) (7,072) (7,704) (8,187) 10.0% Operating Profit 9,993 10,120 11,252 11,247 14,933 15,749 9.0% Other Non Opg (Exp)/Inc 72.0 2.00 (15.0) 0.0 0.0 0.0 8.0% 2016A 2017A 2018F 2019F 2020F Associates & JV Inc 0.0 0.0 0.0 0.0 0.0 0.0 Operating Margin % Net Income Margin % Net Interest (Exp)/Inc (1,430) (1,191) (801) (824) (1,030) (1,030) Exceptional Gain/(Loss) 0.0 0.0 0.0 0.0 0.0 0.0
Pre-tax Profit 8,635 8,931 10,437 10,423 13,903 14,719 Tax (2,182) (2,258) (2,681) (2,678) (3,572) (3,781) Minority Interest (17.0) 4.00 (2.0) (2.0) (2.0) (2.0) Preference Dividend 0.0 0.0 0.0 0.0 0.0 0.0 Net Profit 6,436 6,677 7,754 7,744 10,329 10,936 Net Profit before Except. 6,436 6,677 7,754 7,744 10,329 10,936 EBITDA 11,812 12,208 13,481 12,787 16,583 17,490 Growth Revenue Gth (%) 7.9 8.4 9.2 8.9 11.7 9.2 EBITDA Gth (%) 16.7 3.3 10.4 (5.1) 29.7 5.5 Opg Profit Gth (%) 16.1 1.3 11.2 0.0 32.8 5.5 Net Profit Gth (Pre-ex) 19.1 3.8 16.1 (0.1) 33.4 5.9 (%) Margins & Ratio Gross Margins (%) 22.0 21.8 21.9 20.2 22.3 21.6 Opg Profit Margin (%) 14.2 13.3 13.5 12.4 14.7 14.2 Net Profit Margin (%) 9.1 8.8 9.3 8.5 10.2 9.9 ROAE (%) 18.2 17.3 19.0 17.7 21.5 20.5 ROA (%) 10.6 10.6 12.0 11.3 14.2 14.0 ROCE (%) 8.9 9.1 11.1 10.4 13.2 13.1 Div Payout Ratio (%) 77.7 74.9 64.5 60.1 45.0 56.7 Net Interest Cover (x) 7.0 8.5 14.1 13.6 14.5 15.3
Source: Company, DBSVI
Page 29
Company Focus Gudang Garam
Quarterly / Interim Income Statement (Rpbn) Revenue Trend 30,000 7% FY Dec 2Q2017 3Q2017 4Q2017 1Q2018 2Q2018 3Q2018 6% 25,000 5% Revenue 20,275 21,278 21,783 21,981 23,324 24,584 20,000 4%
Cost of Goods Sold (16,246) (16,586) (16,680) (17,568) (18,748) (19,863) 15,000 3%
2% Gross Profit 4,029 4,692 5,103 4,413 4,576 4,722 10,000 1% Other Oper. (Exp)/Inc (2,216) (1,411) (1,719) (1,690) (2,289) (1,548) 5,000 0%
Operating Profit 1,813 3,281 3,384 2,723 2,286 3,173 0 -1%
2Q2017 3Q2017 4Q2017 1Q2018 2Q2018 3Q2018 3Q2016 4Q2016 1Q2017 Other Non Opg (Exp)/Inc 0.0 0.0 0.0 0.0 0.0 0.0 2Q2016
Revenue Revenue Growth % (QoQ) Associates & JV Inc 0.0 0.0 0.0 0.0 0.0 0.0 Net Interest (Exp)/Inc (130) (216) (222) (195) (101) (180) Exceptional Gain/(Loss) (4.0) (4.0) 0.0 3.00 33.0 18.0
Pre-tax Profit 1,679 3,061 3,162 2,531 2,219 3,011 Tax (444) (766) (826) (638) (555) (805) Minority Interest 0.0 (1.0) 0.0 0.0 2.00 (3.0) Net Profit 1,235 2,293 2,336 1,893 1,665 2,203 Net profit bef Except. 1,239 2,297 2,336 1,890 1,632 2,185 EBITDA 2,346 3,833 4,019 3,260 2,831 3,723
Growth Revenue Gth (%) 1.5 4.9 2.4 0.9 6.1 5.4 EBITDA Gth (%) (28.9) 63.4 4.8 (18.9) (13.1) 31.5 Opg Profit Gth (%) (34.6) 81.0 3.2 (19.6) (16.0) 38.8 Net Profit Gth (Pre-ex) (34.6) 85.4 1.7 (19.1) (13.6) 33.9 (%) Margins Gross Margins (%) 19.9 22.0 23.4 20.1 19.6 19.2 Opg Profit Margins (%) 8.9 15.4 15.5 12.4 9.8 12.9 Net Profit Margins (%) 6.1 10.8 10.7 8.6 7.1 9.0
Source: Company, DBSVI
Page 30
Company Focus Gudang Garam
Balance Sheet (Rpbn) Asset Breakdown FY Dec 2015A 2016A 2017A 2018F 2019F 2020F Net Fixed Debtors - Assets - 3.5% 34.1% Net Fixed Assets 20,106 20,499 21,409 22,868 23,718 23,977 Invts in Associates & JVs 0.0 0.0 0.0 0.0 0.0 0.0 Other LT Assets 830 520 1,587 1,587 1,587 1,587 Assocs'/JVs - Cash & ST Invts 2,726 1,595 2,329 2,179 5,565 8,162 0.0% Inventory 37,256 37,545 37,920 39,664 40,952 42,738
Debtors 1,568 2,090 2,229 2,351 2,626 2,867 Bank, Cash Inventory - and Liquid Other Current Assets 1,019 703 1,286 1,286 1,286 1,286 59.1% Assets - 3.2% Total Assets 63,505 62,952 66,760 69,936 75,733 80,617
ST Debt 20,561 19,753 20,600 20,600 20,600 20,600
Creditor 2,559 1,118 1,214 1,297 1,409 1,552
Other Current Liab 925 767 797 797 797 797 LT Debt 0.0 0.0 0.0 0.0 0.0 0.0 Other LT Liabilities 1,452 1,749 1,961 1,961 1,961 1,961 Shareholder’s Equity 37,900 39,487 42,171 45,263 50,946 55,684 Minority Interests 108 77.0 17.0 18.0 20.0 22.0
Total Cap. & Liab. 63,505 62,952 66,760 69,936 75,733 80,617
Non-Cash Wkg. Capital 36,359 38,453 39,424 41,208 42,657 44,541 Net Cash/(Debt) (17,835) (18,158) (18,271) (18,421) (15,035) (12,438) Debtors Turn (avg days) 8.0 8.8 9.5 9.2 9.0 9.1 Creditors Turn (avg days) 12.2 11.7 6.8 6.5 6.4 6.4 Inventory Turn (avg days) 247.3 237.1 219.2 199.9 191.0 179.9
Asset Turnover (x) 1.2 1.2 1.3 1.3 1.4 1.4 Current Ratio (x) 1.8 1.9 1.9 2.0 2.2 2.4 Quick Ratio (x) 0.2 0.2 0.2 0.2 0.4 0.5 Net Debt/Equity (X) 0.5 0.5 0.4 0.4 0.3 0.2 Net Debt/Equity ex MI (X) 0.5 0.5 0.4 0.4 0.3 0.2 Capex to Debt (%) 14.1 11.3 15.7 14.6 12.1 9.7
Source: Company, DBSVI
Page 31
Company Focus Gudang Garam
Cash Flow Statement (Rpbn) Capital Expenditure FY Dec 2015A 2016A 2017A 2018F 2019F 2020F Rp bn 3,500.0 Pre-Tax Profit 8,635 8,931 10,437 10,423 13,903 14,719 3,000.0 Dep. & Amort. 1,748 2,086 2,244 1,540 1,650 1,740 2,500.0 2,000.0 Tax Paid (2,182) (2,258) (2,681) (2,678) (3,572) (3,781) 1,500.0
Assoc. & JV Inc/(loss) 0.0 0.0 0.0 0.0 0.0 0.0 1,000.0
Chg in Wkg.Cap. (5,440) (1,847) (970) (1,783) (1,450) (1,884) 500.0 Other Operating CF 440 26.0 (824) 0.0 0.0 0.0 0.0 2016A 2017A 2018F 2019F 2020F Net Operating CF 3,201 6,938 8,205 7,502 10,532 10,794 Capital Expenditure (-) Capital Exp.(net) (2,900) (2,226) (3,240) (3,000) (2,500) (2,000) Other Invts.(net) 0.0 0.0 0.0 0.0 0.0 0.0
Invts in Assoc. & JV 0.0 0.0 0.0 0.0 0.0 0.0 Div from Assoc & JV 0.0 0.0 0.0 0.0 0.0 0.0
Other Investing CF 0.0 0.0 0.0 0.0 0.0 0.0
Net Investing CF (2,900) (2,226) (3,240) (3,000) (2,500) (2,000) Div Paid (1,568) (5,024) (5,003) (4,652) (4,646) (6,198) Chg in Gross Debt 2,414 (808) 847 0.0 0.0 0.0
Capital Issues 0.0 0.0 0.0 0.0 0.0 0.0 Other Financing CF 331 1,456 676 0.0 0.0 0.0
Net Financing CF 1,177 (4,377) (3,480) (4,652) (4,646) (6,198) Currency Adjustments 8.00 (5.0) 3.00 0.0 0.0 0.0 Chg in Cash 1,486 330 1,487 (150) 3,386 2,597 Opg CFPS (Rp) 4,491 4,565 4,768 4,826 6,227 6,589 Free CFPS (Rp) 156 2,449 2,580 2,340 4,174 4,571
Source: Company, DBSVI
Page 32
Company Focus Gudang Garam
Valuation
Initiating coverage: BUY, TP of Rp94,700. Our DCF- a better outlook for Indonesia's cigarette sector and expect based TP of Rp94,700 for GGRM assumes a WACC of GGRM to be the main beneficiary from (i) big SKM FF 10.3% and terminal growth (TG) of 4%, with cash flow market share which would improve the volume growth, and discounted back to FY25F. To arrive at our WACC of 10.3%, (ii) strong earnings improvement on the back of a flat excise we assume a risk-free rate of 8.03%, market risk premium tax. of 5%, and equity beta of 1.03x. Our TP implies 17.7x FY19F PE which is slightly above its historical 5-year mean. Currently, the stock is trading at 15.7x FY19F PE. As we see
GGRM forward PE band (x)
25.0
+2 stdev 20.0 +1 stdev
Average
15.0 -1 stdev
-2 stdev
10.0 15 16 17 18
Source: Bloomberg Finance LP (Data as of 31 December 2018)
Page 33
Indonesia Company Focus HM Sampoerna
Bloomberg: HMSP IJ | Reuters: HMSP JK Refer to important disclosures at the end of this report
DBS Group Research . Equity 17 Jan 2019
HOLD No need to rush (Initiating Coverage) Not the best positioned to capture volume growth Last Traded Price ( 16 Jan 2019): Rp3,850 (JCI : 6,413.4) Potential overhang from LQ45 and IDX30 index rebalancing Price Target 12-mth: Rp4,100 (6% upside) HMSP is more of a long-term play, in our view Initiate with HOLD rating Potential Catalyst: No cigarette excise tax hike in FY19F, general Initiate HM Sampoerna (HMSP) with HOLD call and TP of Rp4,100. improvement in consumption sentiment, and market share gains. We commence coverage on HMSP with a TP of RP4,100 that Analyst implies 30x FY19F PE. Our HOLD call is based on: (i) potential David Arie Hartono +62 2130034936 [email protected] downside from the current level, on the back of LQ45 and IDX30
index rebalancing, and (ii) HMSP not being the biggest beneficiary of constant excise tax in FY19F, given its strong market share in Price Relative machine-made clove cigarettes with low tar and nicotine (SKM Rp Relative Index LTN) and hand rolled-clove cigarettes (SKT), instead of SKM FF 4,339.0 207 (SKM full-favour cigarettes, i.e. the “value” segment). 4,139.0 187 Not the biggest beneficiary of excise tax status quo. In our view, 3,939.0 167 the absence of excise tax hikes in FY19F will not benefit HMSP as 147 3,739.0 127 much as its peers (such as GGRM) in terms of volume growth. 3,539.0 107 HMSP is traditionally strong in the SKM LTN segment with its 3,339.0 87 Dec-18 Sampoerna A-Mild brand, which is typically popular with the younger generation. We think that SKM FF will be the segment HM Sampoerna (LHS) Relative JCI (RHS) that will benefit the most with the constant excise tax in FY19F; as Forecasts and Valuation FY Dec (Rpbn) 2017A 2018F 2019F 2020F its customers are predominantly middle-to-low-income earners Revenue 99,091 103,322 112,994 122,841 and its manufacturers can also enjoy better margins (given the lack EBITDA 16,976 16,565 21,422 22,857 of pressure to increase prices to cover higher excise taxes). Pre-tax Profit 16,903 16,464 21,247 22,597 Low free float and index weighting allow HMSP to trade at Net Profit 12,679 12,350 15,936 16,949 Net Pft (Pre Ex.) 12,679 12,350 15,936 16,949 premium vs. GGRM and regional peers, in our view. HMSP has EPS (Rp) 109 106 137 146 been trading at a higher PE multiple vs. GGRM and the regional EPS Pre Ex. (Rp) 109 106 137 146 tobacco players (that are trading at 15x FY19F PE). In our view, EPS Gth (%) (1) (3) 29 6 HMSP has re-rated strongly on the back of its inclusion in the JCI EPS Gth Pre Ex (%) (1) (3) 29 6 Diluted EPS (Rp) 109 106 137 146 index and its shares’ low free float. Given the rumblings of Net DPS (Rp) 108 109 106 137 potential changes for the LQ45 and IDX30 indices in the JCI, i.e. BV Per Share (Rp) 293 290 321 330 from a pure market cap-weighted measure to one that PE (X) 35.3 36.3 28.1 26.4 PE Pre Ex. (X) 35.3 36.3 28.1 26.4 incorporates the free-float factor, HMSP’s share price could be P/Cash Flow (X) 29.1 31.2 24.6 21.8 adversely impacted. EV/EBITDA (X) 25.9 26.6 20.3 18.9 Valuation: Net Div Yield (%) 2.8 2.8 2.8 3.6 Our DCF-based TP of Rp4,100 for HMSP assumes a WACC of P/Book Value (X) 13.1 13.3 12.0 11.7 Net Debt/Equity (X) CASH CASH CASH CASH 10.7% and terminal growth of 4%. ROAE (%) 37.1 36.4 44.8 44.7 Key Risks to Our View: Key downside risks are: (i) weak cigarette volume growth in FY19F, Consensus EPS (Rp): 114 125 134 (ii) changes in excise tax, (iii) slower-than-expected selling price Other Broker Recs: B: 16 S: 1 H: 12 increase, and (iv) loss of market share
At A Glance ICB Industry : Consumer Goods ICB Sector: Tobacco Issued Capital (m shrs) 116,318 Principal Business: PT Hanjaya Mandala Sampoerna (HM Mkt. Cap (Rpbn/US$m) 447,825 / 31,626 Sampoerna) is Indonesia's largest tobacco company controlling Major Shareholders (%) about 33% of Indonesia Tobacco market. The company also Philip Morris Indonesia 92.5% distributes the famous Marlboro brand on the domestic market. Free Float (%) 7.5% Source of all data on this page: Company, DBSVI, Bloomberg 3m Avg. Daily Val (US$m) 5.9 Finance L.P.
ed: KK/ sa: MA, CW, CS
Company Focus HM Sampoerna
Table of Contents
SWOT Analysis ...... 35
Investment Thesis ...... 36
Key Assumption ...... 37
HM Sampoerna Products ...... 38
Company Background ...... 40
Key Management Team ...... 41
Competitive Strengths ...... 42
Growth Strategies ...... 42
Key Risks ...... 42
Critical Data Points To Watch ...... 43
Income Statement ...... 45
Quarterly Income Statement ...... 46
Balance Sheet ...... 47
Cash Flow Statement ...... 48
Valuation ...... 49
Page 35
Company Focus HM Sampoerna
SWOT Analysis
Strengths Weakness Strong market share in SKM LTN segment through If there is an economic slowdown, HMSP’s sales and Sampoerna A-Mild profitability could be eroded to a great extent given the As part of the Philip Morris International (PMI) group, one of premium pricing for its SKM LTN product, Sampoerna A- the largest global tobacco companies, Sampoerna enjoys Mild. marketing advantages. It would be able to leverage on PMI’s world-class marketing expertise. Robust free cash flow and decent dividend yield. Strong management and corporate governance.
Opportunities Threats Upcoming presidential election, government handouts, low Unfavourable government policies with regard to cigarette inflation, lower oil prices, and stable electricity tariffs in excise tax, promotion and advertising of tobacco products, FY19F should lead to higher private consumption, which and availability of public space for smoking. bodes well for cigarette volume. Unfavourable government policies that may decrease The lack of cigarette excise tax hikes would be positive. This purchasing power. implies that cigarette companies do not have to raise their retail prices.
Source: DBSVI
Page 36
Company Focus HM Sampoerna
Investment Thesis
Expect earnings improvement on the back of no excise HMSP is a long-term play, in our view. In the past few tax hikes in FY19F. The government's decision to not increase years, macroeconomic uncertainties and the introduction of the cigarette excise tax in FY19F would certainly benefit the the mid-tar segment (cheaper priced products) have led to industry via: (i) better affordability that can translate into the shift in Indonesia’s cigarette market share towards “value potentially higher volume growth, and (ii) improvement in cigarettes”. As a result, HMSP’s strong position in the mild earnings for cigarette players due to lower cost (as excise tax segment is now seen as a disadvantage, with its Sampoerna constitutes 70% of total cost of sales). A-Mild product’s volume declining by 4% y-o-y in FY17. But we think that Indonesian smokers’ preference will shift back In our estimation, we assume HMSP to grow by 9.4%/8.7% to the mild segment (in line with the global trend) if and y-o-y in FY19F/20F, driven by our volume growth assumption when consumer sentiment fully recovers. We believe that of 3%/1.5% with ASP growing by 6.2%/7.2% in FY19F/20F, HMSP would be a prime beneficiary of any shift towards the respectively. mild segment, thanks to the strong market share that its A- Mild brand commands in the SKM LTN mild segment. No excise tax = strong earnings improvement in FY19F. We estimate HMSP to post a strong earnings growth of Rising wealth could lead to higher demand for premium 29.1% y-o-y in FY19F – assuming that there is no excise tax cigarettes – a boon for HMSP. Besides believing that hike. Our sensitivity analysis shows that every 10% hike in Indonesia’s purchasing power will recover gradually, we also excise tax on SKM will impact HMSP‘s net profit by -25%. We foresee consumers switching back to mild cigarettes (SKM estimate that every 10% hike in excise tax on SKT will impact LTN) when the consumer sentiment recovers, in line with the HMSP‘s net profit by -3%. global trend. If GDP growth exceeds 5.5%, we think that consumers are more likely to return to SKM LTN cigarettes. HMSP market share (%) However, in the near term, we think that consumers will stick 45.0% with SKM FF cigarettes that have more affordable prices. 40.0%
35.0% Correlation between GDP to SKM LTN growth
30.0% 30.0% 7.0%
25.0% 25.0% 6.0% 20.0%
15.0% 20.0% 5.0%
10.0% 15.0% 4.0% 5.0%
0.0% 10.0% 3.0% 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 1Q18 2Q18 3Q18 5.0% 2.0% SKT SKM FF SKM LT SPM Source: Company 0.0% 1.0%
Sampoerna A-Mild market share on the decline (%) -5.0% 0.0% 2010 2011 2012 2013 2014 2015 2016 2017 16.0% SKT LTN y-o-y growth (%) (LHS) GDP growth (%) (RHS) 14.0% Source: Company, World Bank 12.0%
10.0% Biggest potential loser of LQ45 rebalancing. The stock
8.0% exchange (IDX) plans to adjust the LQ45 and IDX30 indices to take liquidity into account for weightage. Large-cap stocks 6.0% with a low free float percentage would be at risk of 4.0% weightage reduction, if the new approach is implemented. 2.0% HMSP will be among the most affected stocks, as its market 0.0% 1Q17 2Q17 3Q17 4Q17 1Q18 2Q18 3Q18 cap is huge and has a big weightage, but suffers from a very
Sampoerna A Mild Dji Sam Soe Marlboro low free float percentage of 7.5% (with 92.5% of its shares Sampoerna U Mild Sampoerna Kretek Others being owned by Philip Morris International). Source: Company
Page 37
Company Focus HM Sampoerna
Key assumptions
HM Sampoerna
HMSP volume (in bn stick) 2017 2018F 2019F 2020F SKT 20.3 18.3 18.5 17.7 SKM 69.8 70.9 74.4 77.2 SPM 11.4 9.1 8.3 7.8
HMSP market share 2017 2018F 2019F 2020F SKT 37.5% 34.8% 36.0% 35.6% SKM FF 9.5% 10.5% 12.2% 12.1% SKM LTN 42.3% 41.0% 38.5% 37.8% SPM 71.2% 60.1% 57.8% 56.8%
HMSP ASP (Rp/stick) 2017 2018F 2019F 2020F SKT 965.7 1,009.7 1,044.8 1,092.1 SKM 950.5 1,031.0 1,099.2 1,182.3 SPM 1,063.9 1,170.3 1,287.4 1,416.1
Source: Company, DBSVI estimate
LQ45 index weighting now and after proposed changes Ticker Name Weight Shares Price Free Float % post LO45 BBCA IJ Equity Bank Central Asia Tbk PT 13.66 24,408.46 24,100.00 43.06 16.6% 2.99% HMSP IJ Equity Hanjaya Mandala Sampoerna Tbk PT 10.29 116,318.08 3,810.00 7.50 2.2% -8.11% BBRI IJ Equity Bank Rakyat Indonesia Persero Tbk PT 9.56 122,112.35 3,370.00 43.25 11.7% 2.14% TLKM IJ Equity Telekomunikasi Indonesia Persero Tbk PT 9.09 99,062.22 3,950.00 47.90 12.3% 3.23% BMRI IJ Equity Bank Mandiri Persero Tbk PT 7.89 46,200.00 7,350.00 39.99 8.9% 1.04% ASII IJ Equity Astra International Tbk PT 7.74 40,483.55 8,225.00 49.84 10.9% 3.17% UNVR IJ Equity Unilever Indonesia Tbk PT 7.48 7,630.00 42,200.00 15.01 3.2% -4.30% GGRM IJ Equity Gudang Garam Tbk PT 3.56 1,924.09 79,550.00 23.78 2.4% -1.16% BBNI IJ Equity Bank Negara Indonesia Persero Tbk PT 3.35 18,462.17 7,800.00 41.16 3.9% 0.55% UNTR IJ Equity United Tractors Tbk PT 2.94 3,730.14 33,975.00 40.46 3.4% 0.43% ELSA IJ Equity Elnusa Tbk PT 0.06 7,298.50 364.00 44.00 0.1% 0.02% Source: Bloomberg Finance LP., DBSVI estimate
IDX30 index weighting now and after proposed changes Ticker Name Shares Price Free Float % Post IDX30 BBCA IJ Equity Bank Central Asia Tbk PT 24,408.46 24,100.00 43.06 17.5% 2.85% HMSP IJ Equity Hanjaya Mandala Sampoerna Tbk PT 116,318.08 3,810.00 7.50 2.3% -8.75% BBRI IJ Equity Bank Rakyat Indonesia Persero Tbk PT 122,112.35 3,370.00 43.25 12.3% 2.04% TLKM IJ Equity Telekomunikasi Indonesia Persero Tbk PT 99,062.22 3,950.00 47.90 13.0% 3.20% BMRI IJ Equity Bank Mandiri Persero Tbk PT 46,200.00 7,350.00 39.99 9.4% 0.92% ASII IJ Equity Astra International Tbk PT 40,483.55 8,225.00 49.84 11.5% 3.17% UNVR IJ Equity Unilever Indonesia Tbk PT 7,630.00 42,200.00 15.01 3.3% -4.69% GGRM IJ Equity Gudang Garam Tbk PT 1,924.09 79,550.00 23.78 2.5% -1.30% BBNI IJ Equity Bank Negara Indonesia Persero Tbk PT 18,462.17 7,800.00 41.16 4.1% 0.51% UNTR IJ Equity United Tractors Tbk PT 3,730.14 33,975.00 40.46 3.5% 0.39% Source: Bloomberg Finance LP., DBSVI estimate
Page 38
Company Focus HM Sampoerna
HM Sampoerna products
SKM LTN Sampoerna A Mild #! SKM LTN Sampoerna A Mild Menthol Sampoerna A Mild Platinum Sampoerna Avolution Merah Sampoerna Avolution Menthol Sampoerna U Mild Sampoerna U Mild Menthol Dji Sam Soe Mild
SKM FF Dji Sam Soe Magnum Filter Sampoerna U Bold Marlboro Black Filter
SKT Dji Sam Soe #1 SKT Dji Sam Soe Premium Sampoerna Hijau
SPM Marlboro Merah Marlboro Gold Marlboro Ice Brust
Source: Company
Sampoerna A-Mild is the leader in SKM LTN segment. Sampoerna U is the second-largest product line that The Sampoerna A family is the SKM LTN product that contributed 12.4% of HMSP’s total volume in 2017. While contributes the largest volume for the company: 41.8% in this does represent a significant decrease from the peak level 2017, down from 42.1% in 2015. In 1H15, it contributed of 15.9% in 2016, Sampoerna U’s contribution stood at a 42% of Sampoerna's total volume. The decline in the mere 9.2% in 2012. The U Mild brand was launched in 2005 Sampoerna A family volume contribution was due to the shift as a mid-priced product in the SKM LTN segment, and had of customer preference to more affordable cigarettes, largely enjoyed a volume CAGR of 15% in 2012-16. SKM FF products. In terms of revenue, the Sampoerna A Dji Sam Soe (DSS) is Sampoerna's flagship brand. The family accounted for 44% of total sales in 2017 (vs. 45% in DSS brand previously focused only on SKT, the premium- 2016). The brands in the A family include (1) A-Mild, which priced segment. With the shift of consumer preference from was launched in 1989 and is the first such SKM LTN product SKT to SKM, Sampoerna is leveraging this well-recognised in Indonesia; (2) Sampoerna Avolution, a super slim SKM LTN brand to expand into the SKM segment. As such, in 2005, product; (3) A Motion, which was launched in April 2015 and Sampoerna extended the brand to SKM FF under Dji Sam Soe is offered in four different colours but whose actual colour is Magnum and in 2014, it introduced Dji Sam Soe Magnum revealed only after the plastic wrapping is removed; and (4) Blue – an SKM LTN product. DSS contributed 12.7% of A-Mild Blue, which was also launched in April 2015 and is an Sampoerna's total volume in 2017, representing a slight SKM LTN with a tar content of less than 10mg. improvement from 12.1% in 2016. The company’s net revenue from SKM increased by 8.6% y- Marlboro is fourth-largest volume contributor, with its o-y to Rp66.3tr – constituting 66.9% of total net revenue in volume making up 11.2% of the total in 2017, down from 2017 (2016: 64.0%). The increase was driven by favourable 14.3% in 2016. HMSP has been an exclusive distributor of pricing and higher sales volume. SKM sales volume increased Marlboro cigarettes in Indonesia since 2005, under a long- 0.9% y-o-y from 69.2bn to 69.8bn sticks in 2017, mainly term distribution agreement with PT Philip Morris Indonesia reflecting the strong performance of Dji Sam Soe Magnum (PMID). PMID manufacturers the Marlboro brand products at Mild 16s and Marlboro Filter Black 20s, but this was partially its facility in Karawang, West Java. PMID's facility at offset by Sampoerna A and Sampoerna U’s muted showing Karawang is segregated, and managed independently from due to the impact of price increases and pressure from its Sampoerna's facilities in the area. competitors’ value products.
Page 39
Company Focus HM Sampoerna
The company’s machine-made white cigarette (SPM) revenue, HMSP revenue contribution (%)
stemming from Marlboro’s product line-up, decreased by 100.0% 13.7% y-o-y to Rp12.1tr – mainly due to lower volume, 90.0% 15.0% 14.7% though this was partially offset by favourable pricing in 2017. 80.0% 15.1% 12.2% The soft performance of SPM variants was mainly due to 70.0% 14.7% 14.0% 13.6% 13.9% competitive pressure arising from SPM products with 60.0% 50.0% 10.9% 10.4% 12.0% 9.9% significantly lower taxes. This tax advantage will be eliminated 40.0% in January 2019 through the Ministry of Finance’s excise tax 30.0% roadmap which was already rolled out. Marlboro’s volume 20.0% 43.9% 44.5% 44.9% 44.9% loss in the SPM category was more than compensated by the 10.0% success of SKM variants in the Marlboro family, namely 0.0% 2014 2015 2016 2017 Marlboro Filter Black. The overall performance of the Sampoerna A Sampoerna U DSS Magnum Marlboro family was decent in terms of both volume and DSS (SKT) Marlboro SPM Marlboro SKM market share growth across 2017. Source: Company
HMSP volume contribution (%) HMSP market share per product (%)
100.0% 35.0%
90.0% 30.0% 14.5% 14.3% 80.0% 14.7% 11.2% 25.0% 70.0% 12.0% 11.8% 12.1% 12.7% 60.0% 6.1% 8.4% 7.2% 10.0% 20.0% 50.0% 15.4% 13.9% 15.9% 12.4% 15.0% 40.0% 10.0% 30.0% 20.0% 41.4% 42.1% 41.9% 41.8% 5.0% 10.0% 0.0% 0.0% 2014 2015 2016 2017 2018F 2019F 2014 2015 2016 2017 Sampoerna A Sampoerna U DSS Magnum Sampoerna A Sampoerna U DSS Magnum DSS (SKT) Marlboro SPM Marlboro SKM DSS (SKT) Marlboro SPM Marlboro SKM Source: Company, DBSVI estimate Source: Company
Page 40
Company Focus HM Sampoerna
Company Background
Corporate History. PT Hanjaya Mandala Sampoerna Sampoerna A-Mild in 1989 – it is now the leading brand in (HMSP) was established in 1913, and got the ball rolling with Indonesia’s cigarette market. The company also produces the Dji Sam Soe brand which is known as the legendary “king some of the best known kretek (clove) cigarette brand of kretek”. The company is a subsidiary of PT Philip Morris families including Sampoerna Kretek and Sampoerna U as Indonesia (PMID) and an affiliate of Philip Morris International well as distributes Marlboro, the leading international (PMI), a leading international tobacco company. The company cigarette brand manufactured by PMID. The company has pioneered the machine-made kretek low tar nicotine (SKM been the market leader, with a share of 33.2% of the LTN) cigarette category in Indonesia with the introduction of Indonesian cigarette market in 9M18.
Sales Trend Profitability Trend Rp bn Rp bn 22,349 120,000 20.0% 18.0% 100,000 16.0% 20,349 14.0% 80,000 12.0% 18,349 60,000 10.0% 8.0% 16,349 40,000 6.0% 4.0% 20,000 14,349 2.0% 0 0.0% 2016A 2017A 2018F 2019F 2020F 12,349 2016A 2017A 2018F 2019F 2020F
Total Revenue Revenue Growth (%) (YoY) Operating EBIT Pre tax Profit Net Profit
Source: Company, DBSVI
Page 41
Company Focus HM Sampoerna
Key Management Team
Name Pos ition Mindaugas Trumpaitis President Director Mr Mindaguas Tumpaitis was appointed as Sampoerna's President Director on 2016. He joined PMI Lithuania in 1998 in sales and progressed his career through various positions including Country Manager Latvia and Manager Trade Marketing and Sales Development in 2005, then he served as Manager Strategic Planning in PMI Switzerland until 2007. Since then he garnered progressive experience in managing tobacco businesses in medium and large markets within PMI global affiliates. He holds a bachelor degree in Economics and a Master Degree in Business Management both from Klaipeda University, and participated in Executive MBA courses from INSEAD in France.
William Reilly Giff Director Mr William Reilly Giff was appointed as Sampoerna Director on April 2017, with responsibility for finance. He started his career in Finance as Auditor in Arthur Andersen, and as Internal Controls in Diamandis Communication before joining PMI in 1990. He holds a Bachelor Degree in Accounting from Fairfield University.
Andre Dahan Director Mr Andre Dahan was appointed as Sampoerna Director since April 2015. He joined PMI Switzerland in 2003 as Manager Product and Marketing Innovation and progressing through several key positions in Marketing at PMI affiliates in Poland, Hungary, Czech Republic, and in Russia, building 16 years of experience in the industry. He earned his Master Degree in Business Administration from Institut d'Etudes Politiques de Paris.
The Ivan Cahyadi Director Mr The Ivan Cahyadi was appointed as Sampoerna Director on April 2016, responsible for sales. He joined Sampoerna in 1996 as a Management Trainee and has progressed through a number of positions in Sampoerna. He was then relocated to PMI affiliate in Malaysia as Director Sales and Distribution in 2009, before back to Sampoerna in 2010 as Head of Sales Zone prior to his appointement as the Board of Directors. He received a bachelor degree in Economics from the University of Surabaya.
Mimi Kurniawan Director Ms Mimi Kurniawan was appointed as Sampoerna Director on April 2016, responsible for Human Resources. She first joined Sampoerna in 1996 as a Project Officer and then progressed through a number of positions in Sampoerna. Prior to her appoitment as Director, she was a Head of Human Resources. She received Bachelor Degree in Industrial Engineering from Kristen Petra University.
Yos Adiguna Ginting Independent Director Mr Yos Adiguna Ginting was appointed as Sampoerna Director since June 2003. He joined Sampoerna since in 2002 as an Organization Development Specialist, after which he progressed through several key positions at Sampoerna and other PMI affiliates. He is a holder Bachelor of Science Degree in Chemistry and a Doctor of Philosophy Degree in Theoritical Chemistry, which he earned from the University of Tasmania.
Michael Schrarer Director Mr Michael Schrarer was appointed as Sampoerna Director on November 2016, with responsibility for Operations. He joined Philip Morris Germany as Management Trainee in 1997 and progressed through his career through varioius positions.He holds a Master Degree in Mechanical Engineering and Business Management from the Technical University of Vienna.
Troy J Modlin Director Mr Troy J Modlin was appointed as Sampoerna Director on September 2015 and is in charge of Corporate Affairs.He joined PMI in 2005 in Switzerland as Manager and was later appointed as Director of Government Affairs in 2008, before assuming the Director of Corporate Affairs position in Hong Kong in 2009 and Bangkok in 2011. He earned his Bachelor of Science Degree in Business Administration from the University of Colorado and Master Degree of International Management from the University of Denver. Source: Company
Page 42
Company Focus HM Sampoerna
Competitive Strengths
Sampoerna A-Mild is the leader in SKM LTN segment. because of the relatively low prices charged for a pack of The Sampoerna A family is the SKM LTN product that cigarettes. There is nowhere on earth where a pack of contributes the largest volume for the company: 41.8% in cigarettes can be as cheap as in Indonesia. On average, a 2017, down from 42.1% in 2015. In 1H15, it contributed pack costs US$1.3 in Indonesia. 42% of Sampoerna's total volume. The decline in the Sampoerna A family volume contribution was due to the shift Key Risks of customer preference to more affordable cigarettes, largely SKM FF products. In terms of revenue, the Sampoerna A Fears that the Indonesian government will increase excise family accounted for 44% of total sales in 2017 (vs. 45% in tax further in FY20F. Early this year, the Indonesian 2016). The brands in the A family include (1) A-Mild, which government confirmed that it will not increase the excise tax was launched in 1989 and is the first such SKM LTN product on cigarettes in 2019. As this should give some breathing in Indonesia; (2) Sampoerna Avolution, a super slim SKM LTN space to the cigarette industry, we estimate that the industry product; (3) A Motion, which was launched in April 2015 and volume could improve in FY19F. This would somewhat upset is offered in four different colours but whose actual colour is the government’s excise tax revenue collection for 2019 as it revealed only after the plastic wrapping is removed; and (4) had previously decided to increase the APBN 2019 tobacco A-Mild Blue, which was also launched in April 2015 and is an excise tax revenue target for 2019F by 7.15% to Rp158.8tr SKM LTN with a tar content of less than 10mg. (2018F: Rp148.2tr). The government has also decided to delay the simplification of the excise tax. Under the currently Dji Sam Soe (DSS) is Sampoerna's flagship brand. The proposed simplification, small- and mid-sized cigarette DSS brand previously focused only on SKT, the premium- manufacturers will need to fend for themselves against the priced segment. With the shift of consumer preference from bigger players. As of end-October 2018, excise tax revenue SKT to SKM, Sampoerna is leveraging this well-recognised collection reached Rp106tr (+9.8% y-o-y) with 95% coming brand to expand into the SKM segment. As such, in 2005, from tobacco excise tax. We expect excise tax to head north Sampoerna extended the brand to SKM FF under Dji Sam Soe in FY20F after being kept stagnant in FY19F; as the Magnum and in 2014, it introduced Dji Sam Soe Magnum government still plans to collect more excise tax from the Blue, an SKM LTN product. DSS contributed 12.7% of cigarette industry. This would impact the cigarette industry Sampoerna's total volume in 2017, representing a slight via: (i) a likely decline in cigarette industry volume in FY20F, improvement from 12.1% in 2016. and (ii) lower earnings growth for cigarette players in FY20F.
Growth Strategies Sensitivity analysis of excise tax hike on HMSP’s earnings. Our sensitivity analysis shows that every 10% hike in excise Consistent product quality and relentless marketing and tax on SKM will impact HMSP‘s net profit by -25%. We distribution efforts would play a vital part in contributing to estimate that every 10% hike in excise tax on SKT will impact both volume and revenue growth for HMSP. The ability to HMSP‘s net profit by -3%. maintain product quality on a consistent basis would enable HMSP to have a sustainable market foothold for its products. Biggest potential loser of LQ45 rebalancing. The stock exchange (IDX) plans to adjust the LQ45 and IDX30 indices to Aggressive advertising and promotion. HMSP’s take liquidity into account for weightage. Large-cap stocks advertising and promotion programmes will continue to build with a low free float percentage would be at risk of and maintain its brand equity in a hotly contested consumer weightage reduction, if the new approach is implemented. segment, which has continued and will continue to attract HMSP will be among the most affected stocks, as its market new players seeking a slice of Indonesia’s huge market cap is huge and has a big weightage, but suffers from a very potential. low free float percentage of 7.5% (with 92.5% of its shares being owned by Philip Morris International). Another factor that supports cigarette consumption in Indonesia is that its citizens have easy access to cigarettes, not just because of the wide distribution network that makes cigarettes available in all corners of the archipelago but also
Page 43
Company Focus HM Sampoerna
CRITICAL DATA POINTS TO WATCH Critical Factors: SKM volume 77.2 78.0 74.4 69 69.8 70.9 Cigarette-excise tax.The biggest risk for cigarette players stems from 66.8 the Indonesian government’s tendency to raise the excise tax rates on 55.7 tobacco products at the start of the year. This is to collect tax 44.6 revenue as well as to discourage the consumption of cigarettes (as 33.4 the higher excise taxes should lead to higher retail prices). Thus, 22.3 higher excise taxes would ultimately result in muted volume growth 11.1 for the entire cigarette industry. 0.0 2016A 2017A 2018F 2019F 2020F
Indonesia’s consumer purchasing power. In the past, its regional SKT volume minimum wage (UMR) growth outpaced excise tax growth, leading 21.5 to better volume growth for the cigarette industry, thanks to two 21.9 20.3 18.5 18.3 17.7 main reasons: 17.5 - Most smokers in Indonesia are in the low- to middle-income groups, which are more sensitive towards selling price 13.1
movements. 8.8 - Higher UMR growth enables the low- to middle-income groups to have higher disposable income. 4.4
0.0 However, the situation has changed in the past three years. Excise tax 2016A 2017A 2018F 2019F 2020F growth has outpaced UMR growth, resulting in the softening of SPM volume purchasing power for the low- to middle-income groups. This has caused cigarette volume growth to decline to single digits. 15.36 15.1
12.28 11.4 ASP increase to maintain margins. Normally, in the event of higher 9.13 9.21 8.33 excise taxes, cigarette companies will increase their ASPs to pass on 7.78 the additional tax expenses. If HMSP fails to pass on such higher 6.14 expenses via higher ASP in a timely manner, its gross profit margin will be eroded. 3.07
0.00 2016A 2017A 2018F 2019F 2020F Source: Company, DBSVI
Page 44
Company Focus HM Sampoerna
Balance Sheet: Strong free cash flow position. HMSP’s free cash flow rose by 9.2% Leverage & Asset Turnover (x) 0.05 2.4 y-o-y to Rp14.2tr in 2017, mainly thanks to the higher cash 0.05 generated from operating activities on the back of higher cash 0.04 2.4 receipts from customers but this was partially offset by higher cash 0.04 0.03 2.4 outlay for excise taxes. There were no significant changes in net cash 0.03 used in investing compared to 2016. Higher net cash was used in 0.02 2.3 financing activities, on the back of higher dividends paid in 2017. 0.02 0.01 2.3 Strong balance sheet. HMSP’s total assets as of 31 Dec 2017 0.01 0.00 2.3 increased by Rp0.6tr to Rp43.1tr compared to the prior year, mainly 2016A 2017A 2018F 2019F 2020F due to the increase in current assets by Rp0.5tr to Rp34.2tr. The Gross Debt to Equity (LHS) Asset Turnover (RHS) increase in current assets can be attributed mainly to higher cash and Capital Expenditure cash equivalents, though this was partially offset by lower inventories Rp bn 1,600.0 and receivables from related parties. There were no significant 1,400.0 changes in non-current assets compared to 2016. 1,200.0 1,000.0 Share Price Drivers: 800.0 No excise tax hike in FY19F. After three years of negative growth for 600.0 Indonesia’s cigarette volume, we expect positive volume growth this 400.0 year as excise taxes will be unchanged in FY19F. Expectations of 200.0 0.0 volume growth improvement in FY19F are fuelled by the better 2016A 2017A 2018F 2019F 2020F cigarette affordability as wages rise and cigarette prices remain Capital Expenditure (-) constant.. ROE (%) 45.0% Key Risks: 40.0% Excise tax hike. A higher-than-expected excise tax hike may affect (i) 35.0% the industry volume, and (ii) HMSP’s profitability going forward, 30.0% especially if the economic environment remains weak. 25.0% 20.0%
15.0% Regulatory issues. The regulatory issues may include: (i) packaging 10.0% requirements, and (ii) advertisement bans. 5.0%
0.0% 2016A 2017A 2018F 2019F 2020F Raw material prices. The biggest raw materials are: (i) tobacco, and (ii) cloves that are sourced locally. The price movements of both raw Forward PE Band (x) materials could pose risks to the company’s GPM. Note that the (x) impact would be minimal and has some lag time given that cigarette 31.1 companies have ample inventory to buffer against any immediate 30.1 impact of swings in raw material prices. 29.1
28.1 Avg: 27.9x Shift in consumer preference. As Indonesia's cigarette industry is 27.1 dominated by kretek-based products, any change in consumer 26.1 preference would be detrimental to HMSP’s current product 25.1 portfolio. 24.1 Dec-18
Adoption of healthier lifestyle. As the global population moves PB Band (x) towards a healthier lifestyle, there is a growing number of people (x) who could kick the habit of smoking – thus leaving the industry in a 14.8 sunset stage. 14.3 13.8 Company Background 13.3 Avg: 13.14x PT Hanjaya Mandala Sampoerna (HM Sampoerna) is Indonesia's 12.8 largest tobacco company that controls about 33% of Indonesia’s 12.3 tobacco market. The company also distributes the famous Marlboro 11.8 brand in the domestic market. 11.3 Dec-18
Source: Company, DBSVI
Page 45
Company Focus HM Sampoerna
Income Statement (Rpbn) Margins Trend FY Dec 2015A 2016A 2017A 2018F 2019F 2020F 19.0% 18.0% Revenue 89,069 95,467 99,091 103,322 112,994 122,841 17.0% Cost of Goods Sold (67,305) (71,612) (74,876) (79,464) (83,787) (91,639) 16.0% Gross Profit 21,764 23,855 24,216 23,859 29,206 31,202 15.0% 14.0% Other Opng (Exp)/Inc (7,716) (7,834) (8,105) (8,217) (8,800) (9,463) 13.0% Operating Profit 14,048 16,020 16,111 15,642 20,407 21,739 12.0% Other Non Opg (Exp)/Inc (61.8) 159 (14.3) 0.0 0.0 0.0 11.0% 2016A 2017A 2018F 2019F 2020F Associates & JV Inc 15.8 0.39 6.46 7.11 7.82 8.60 Operating Margin % Net Income Margin % Net Interest (Exp)/Inc (69.5) 832 791 808 824 841 Exceptional Gain/(Loss) 0.0 0.0 0.0 0.0 0.0 0.0
Pre-tax Profit 13,941 17,019 16,903 16,464 21,247 22,597 Tax (3,569) (4,249) (4,224) (4,115) (5,310) (5,648) Minority Interest 0.0 0.0 0.0 0.0 0.0 0.0 Preference Dividend 0.0 0.0 0.0 0.0 0.0 0.0 Net Profit 10,371 12,770 12,679 12,350 15,936 16,949 Net Profit before Except. 10,371 12,770 12,679 12,350 15,936 16,949 EBITDA 14,665 16,912 16,976 16,565 21,422 22,857 Growth Revenue Gth (%) 10.4 7.2 3.8 4.3 9.4 8.7 EBITDA Gth (%) 2.7 15.3 0.4 (2.4) 29.3 6.7 Opg Profit Gth (%) 1.8 14.0 0.6 (2.9) 30.5 6.5 Net Profit Gth (Pre-ex) 1.8 23.1 (0.7) (2.6) 29.0 6.4 (%) Margins & Ratio Gross Margins (%) 24.4 25.0 24.4 23.1 25.8 25.4 Opg Profit Margin (%) 15.8 16.8 16.3 15.1 18.1 17.7 Net Profit Margin (%) 11.6 13.4 12.8 12.0 14.1 13.8 ROAE (%) 45.6 38.6 37.1 36.4 44.8 44.7 ROA (%) 31.2 31.7 29.6 28.2 33.4 31.8 ROCE (%) 40.9 34.6 33.2 32.1 40.0 40.0 Div Payout Ratio (%) 118.1 81.0 98.8 102.6 77.4 94.0 Net Interest Cover (x) 202.2 NM NM NM NM NM
Source: Company, DBSVI
Page 46
Company Focus HM Sampoerna
Quarterly / Interim Income Statement (Rpbn) Revenue Trend 30,000 20% FY Dec 2Q2017 3Q2017 4Q2017 1Q2018 2Q2018 3Q2018 15% 25,000 10% Revenue 24,014 25,704 26,798 23,136 26,021 28,377 20,000 5%
Cost of Goods Sold (18,425) (19,509) (20,173) (17,640) (20,088) (21,499) 15,000 0%
-5% Gross Profit 5,589 6,195 6,625 5,496 5,933 6,879 10,000 -10% Other Oper. (Exp)/Inc (2,112) (1,985) (2,363) (1,720) (2,168) (2,308) 5,000 -15%
Operating Profit 3,477 4,210 4,262 3,776 3,765 4,571 0 -20%
2Q2016 3Q2016 4Q2016 1Q2017 2Q2017 1Q2018 2Q2018 3Q2018 4Q2017 Other Non Opg (Exp)/Inc (36.9) (15.2) 27.9 4.40 77.3 (33.1) 3Q2017
Revenue Revenue Growth % (QoQ) Associates & JV Inc 3.07 (0.3) (1.6) 9.66 1.64 0.12 Net Interest (Exp)/Inc 226 181 213 185 243 233 Exceptional Gain/(Loss) 0.0 0.0 0.0 0.0 0.0 0.0
Pre-tax Profit 3,670 4,376 4,502 3,975 4,086 4,771 Tax (911) (1,088) (1,169) (942) (1,006) (1,194) Minority Interest 0.0 0.0 0.0 0.0 0.0 0.0 Net Profit 0.0 0.0 0.0 0.0 0.0 0.0 Net profit bef Except. 0.0 0.0 0.0 0.0 0.0 0.0 EBITDA 3,443 4,195 4,289 3,790 3,844 4,538
Growth Revenue Gth (%) 6.4 7.0 4.3 (13.7) 12.5 9.1 EBITDA Gth (%) (17.6) 21.8 2.2 (11.6) 1.4 18.1 Opg Profit Gth (%) (16.5) 21.1 1.2 (11.4) (0.3) 21.4 Net Profit Gth (Pre-ex) nm nm nm nm nm nm (%) Margins Gross Margins (%) 23.3 24.1 24.7 23.8 22.8 24.2 Opg Profit Margins (%) 14.5 16.4 15.9 16.3 14.5 16.1 Net Profit Margins (%) 0.0 0.0 0.0 0.0 0.0 0.0
Source: Company, DBSVI
Page 47
Company Focus HM Sampoerna
Balance Sheet (Rpbn) Asset Breakdown FY Dec 2015A 2016A 2017A 2018F 2019F 2020F Net Fixed Debtors - Assets - 9.6% 18.7% Net Fixed Assets 6,281 6,988 6,891 7,171 7,497 7,875
Invts in Associates & JVs 64.2 62.2 63.4 63.4 63.4 63.4 Assocs'/JVs - Other LT Assets 1,858 1,810 2,007 2,007 2,007 2,007 0.2% Cash & ST Invts 1,719 5,056 7,502 7,981 12,484 15,639 Inventory 19,072 19,442 18,023 19,430 22,050 23,448
Debtors 2,459 3,323 3,598 3,680 3,715 4,039 Bank, Cash Inventory - and Liquid Other Current Assets 6,558 5,827 5,057 4,046 3,237 2,589 50.7% Assets - 20.8% Total Assets 38,011 42,508 43,141 44,378 51,053 55,661
ST Debt 0.0 0.0 0.0 0.0 0.0 0.0
Creditor 3,191 3,871 3,666 2,723 3,064 3,190
Other Current Liab 1,348 2,558 2,817 5,249 7,830 11,147 LT Debt 0.0 0.0 0.0 0.0 0.0 0.0 Other LT Liabilities 1,456 1,905 2,545 2,622 2,788 2,940 Shareholder’s Equity 32,016 34,175 34,113 33,784 37,371 38,383 Minority Interests 0.0 0.0 0.0 0.0 0.0 0.0
Total Cap. & Liab. 38,011 42,508 43,141 44,378 51,053 55,661
Non-Cash Wkg. Capital 23,550 22,163 20,196 19,184 18,108 15,739 Net Cash/(Debt) 1,719 5,056 7,502 7,981 12,484 15,639 Debtors Turn (avg days) 7.1 11.1 12.7 12.9 11.9 11.5 Creditors Turn (avg days) 16.3 18.2 18.6 14.8 12.8 12.6 Inventory Turn (avg days) 100.0 99.2 92.4 87.0 91.4 91.7
Asset Turnover (x) 2.7 2.4 2.3 2.4 2.4 2.3 Current Ratio (x) 6.6 5.2 5.3 4.4 3.8 3.2 Quick Ratio (x) 0.9 1.3 1.7 1.5 1.5 1.4 Net Debt/Equity (X) CASH CASH CASH CASH CASH CASH Net Debt/Equity ex MI (X) CASH CASH CASH CASH CASH CASH Capex to Debt (%) N/A N/A N/A N/A N/A N/A
Source: Company, DBSVI
Page 48
Company Focus HM Sampoerna
Cash Flow Statement (Rpbn) Capital Expenditure FY Dec 2015A 2016A 2017A 2018F 2019F 2020F Rp bn 1,600.0 Pre-Tax Profit 14,002 16,180 16,104 15,649 20,414 21,748 1,400.0 1,200.0 Dep. & Amort. 655 724 865 908 1,000 1,101 1,000.0 Tax Paid (3,569) (4,249) (4,224) (4,115) (5,310) (5,648) 800.0 Assoc. & JV Inc/(loss) 0.0 0.0 0.0 0.0 0.0 0.0 600.0 400.0 Chg in Wkg.Cap. (13,602) 1,387 1,967 1,012 1,076 2,369 200.0 Other Operating CF 3,326 34.9 665 884 991 993 0.0 2016A 2017A 2018F 2019F 2020F Net Operating CF 811 14,077 15,376 14,338 18,170 20,563 Capital Expenditure (-) Capital Exp.(net) (781) (1,050) (1,142) (1,189) (1,326) (1,479) Other Invts.(net) 0.0 0.0 0.0 0.0 0.0 0.0
Invts in Assoc. & JV 0.0 0.0 0.0 0.0 0.0 0.0 Div from Assoc & JV 0.0 0.0 0.0 0.0 0.0 0.0
Other Investing CF (3,754) 688 761 0.0 0.0 0.0
Net Investing CF (4,534) (362) (381) (1,189) (1,326) (1,479) Div Paid (12,250) (10,350) (12,527) (12,671) (12,342) (15,928) Chg in Gross Debt (2,835) 0.0 0.0 0.0 0.0 0.0
Capital Issues 20,769 0.0 0.0 0.0 0.0 0.0 Other Financing CF (215) (26.7) (22.3) 0.0 0.0 0.0
Net Financing CF 5,468 (10,377) (12,550) (12,671) (12,342) (15,928) Currency Adjustments 0.0 0.0 0.0 0.0 0.0 0.0 Chg in Cash 1,744 3,337 2,446 479 4,503 3,156 Opg CFPS (Rp) 129 109 115 115 147 156 Free CFPS (Rp) 0.27 112 122 113 145 164
Source: Company, DBSVI
Page 49
Company Focus HM Sampoerna
Valuation
• Initiating coverage with HOLD call and TP of Rp4,100. skyrocket to 40-49x (vs. 32-37x prior to its inclusion in the Our DCF-based TP of Rp4,100 for HMSP assumes a WACC JCI). We understand that the fundamentals of the cigarettes of 10.7% and terminal growth (TG) of 4%, with cash flow industry should improve in FY19F in the absence of excise discounted back to FY25F. To arrive at our WACC of 10.7%, tax hikes, and the positive developments in FY19F include: (i) we assume a risk-free rate of 8.03%, market risk premium rising cigarette industry volume, and (ii) better earnings of 5%, and equity beta of 1.05. Our TP implies an FY19F PE prospects for most cigarette players, including HMSP. of 30x, which we believe is fair and reasonable in view of However, we cannot deny that the rebalancing of the LQ45 HMSP’s historically high PE premium over GGRM and the and IDX30 indices could pose short-term downside risks to regional peers. HMSP has re-rated strongly on the back of its HMSP’s share price. inclusion in the JCI index, causing its PE valuation to
HMSP forward PE band (x)
49.0
44.0 +2 stdev
39.0 +1 stdev Average 34.0 -1 stdev 29.0 -2 stdev 24.0 15 16 17 18
Source: Bloomberg Finance LP
GGRM is trading at 44.5% discount vs HMSP (average is at 49%) 0.0%
-10.0%
-20.0%
-30.0%
-40.0%
-50.0%
-60.0%
-70.0%
3/31/2017 7/31/2018 5/31/2017 7/31/2017 9/30/2017 1/31/2018 3/31/2018 5/31/2018 9/30/2018 11/30/2018 11/30/2017 Source: Bloomberg Finance LP
Page 50
Industry Focus Indonesia Cigarettes
DBSVI recommendations are based an Absolute Total Return* Rating system, defined as follows: STRONG BUY (>20% total return over the next 3 months, with identifiable share price catalysts within this time frame) BUY (>15% total return over the next 12 months for small caps, >10% for large caps) HOLD (-10% to +15% total return over the next 12 months for small caps, -10% to +10% for large caps) FULLY VALUED (negative total return i.e. > -10% over the next 12 months) SELL (negative total return of > -20% over the next 3 months, with identifiable catalysts within this time frame) Share price appreciation + dividends
Completed Date: 17 Jan 2019 16:25:34 (WIB) Dissemination Date: 17 Jan 2019 17:34:16 (WIB)
Sources for all charts and tables are DBSVI unless otherwise specified.
GENERAL DISCLOSURE/DISCLAIMER This report is prepared by PT DBS Vickers Sekuritas Indonesia (''DBSVI''). This report is solely intended for the clients of DBS Bank Ltd, its respective connected and associated corporations and affiliates only and no part of this document may be (i) copied, photocopied or duplicated in any form or by any means or (ii) redistributed without the prior written consent of PT DBS Vickers Sekuritas Indonesia (''DBSVI'').
The research set out in this report is based on information obtained from sources believed to be reliable, but we (which collectively refers to DBS Bank Ltd, its respective connected and associated corporations, affiliates and their respective directors, officers, employees and agents (collectively, the “DBS Group”) have not conducted due diligence on any of the companies, verified any information or sources or taken into account any other factors which we may consider to be relevant or appropriate in preparing the research. Accordingly, we do not make any representation or warranty as to the accuracy, completeness or correctness of the research set out in this report. Opinions expressed are subject to change without notice. This research is prepared for general circulation. Any recommendation contained in this document does not have regard to the specific investment objectives, financial situation and the particular needs of any specific addressee. This document is for the information of addressees only and is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate independent legal or financial advice. The DBS Group accepts no liability whatsoever for any direct, indirect and/or consequential loss (including any claims for loss of profit) arising from any use of and/or reliance upon this document and/or further communication given in relation to this document. This document is not to be construed as an offer or a solicitation of an offer to buy or sell any securities. The DBS Group, along with its affiliates and/or persons associated with any of them may from time to time have interests in the securities mentioned in this document. The DBS Group, may have positions in, and may effect transactions in securities mentioned herein and may also perform or seek to perform broking, investment banking and other banking services for these companies.
Any valuations, opinions, estimates, forecasts, ratings or risk assessments herein constitutes a judgment as of the date of this report, and there can be no assurance that future results or events will be consistent with any such valuations, opinions, estimates, forecasts, ratings or risk assessments. The information in this document is subject to change without notice, its accuracy is not guaranteed, it may be incomplete or condensed, it may not contain all material information concerning the company (or companies) referred to in this report and the DBS Group is under no obligation to update the information in this report.
This publication has not been reviewed or authorized by any regulatory authority in Singapore, Hong Kong or elsewhere. There is no planned schedule or frequency for updating research publication relating to any issuer.
The valuations, opinions, estimates, forecasts, ratings or risk assessments described in this report were based upon a number of estimates and assumptions and are inherently subject to significant uncertainties and contingencies. It can be expected that one or more of the estimates on which the valuations, opinions, estimates, forecasts, ratings or risk assessments were based will not materialize or will vary significantly from actual results. Therefore, the inclusion of the valuations, opinions, estimates, forecasts, ratings or risk assessments described herein IS NOT TO BE RELIED UPON as a representation and/or warranty by the DBS Group (and/or any persons associated with the aforesaid entities), that:
(a) such valuations, opinions, estimates, forecasts, ratings or risk assessments or their underlying assumptions will be achieved, and (b) there is any assurance that future results or events will be consistent with any such valuations, opinions, estimates, forecasts, ratings or risk assessments stated therein.
Please contact the primary analyst for valuation methodologies and assumptions associated with the covered companies or price targets.
Page 51
Industry Focus Indonesia Cigarettes
Any assumptions made in this report that refers to commodities, are for the purposes of making forecasts for the company (or companies) mentioned herein. They are not to be construed as recommendations to trade in the physical commodity or in the futures contract relating to the commodity referred to in this report.
DBSVUSA, a US-registered broker-dealer, does not have its own investment banking or research department, has not participated in any public offering of securities as a manager or co-manager or in any other investment banking transaction in the past twelve months and does not engage in market-making.
ANALYST CERTIFICATION The research analyst(s) primarily responsible for the content of this research report, in part or in whole, certifies that the views about the companies and their securities expressed in this report accurately reflect his/her personal views. The analyst(s) also certifies that no part of his/her compensation was, is, or will be, directly or indirectly, related to specific recommendations or views expressed in the report. The research analyst (s) primarily responsible for the content of this research report, in part or in whole, certifies that he or his associate1 does not serve as an officer of the issuer or the new listing applicant (which includes in the case of a real estate investment trust, an officer of the management company of the real estate investment trust; and in the case of any other entity, an officer or its equivalent counterparty of the entity who is responsible for the management of the issuer or the new listing applicant) and the research analyst(s) primarily responsible for the content of this research report or his associate does not have financial interests2 in relation to an issuer or a new listing applicant that the analyst reviews. DBS Group has procedures in place to eliminate, avoid and manage any potential conflicts of interests that may arise in connection with the production of research reports. The research analyst(s) responsible for this report operates as part of a separate and independent team to the investment banking function of the DBS Group and procedures are in place to ensure that confidential information held by either the research or investment banking function is handled appropriately. There is no direct link of DBS Group's compensation to any specific investment banking function of the DBS Group.
COMPANY-SPECIFIC / REGULATORY DISCLOSURES 1. DBS Bank Ltd, DBS HK, DBS Vickers Securities (Singapore) Pte Ltd (''DBSVS'') or their subsidiaries and/or other affiliates do not have a proprietary position in the securities recommended in this report as of 30 Nov 2018 2. Neither DBS Bank Ltd nor DBS HK market makes in equity securities of the issuer(s) or company(ies) mentioned in this Research Report.
Compensation for investment banking services: 3. DBSVUSA does not have its own investment banking or research department, nor has it participated in any public offering of securities as a manager or co-manager or in any other investment banking transaction in the past twelve months. Any US persons wishing to obtain further information, including any clarification on disclosures in this disclaimer, or to effect a transaction in any security discussed in this document should contact DBSVUSA exclusively.
Disclosure of previous investment recommendation produced: 4. DBS Bank Ltd, DBS Vickers Securities (Singapore) Pte Ltd (''DBSVS''), their subsidiaries and/or other affiliates may have published other investment recommendations in respect of the same securities / instruments recommended in this research report during the preceding 12 months. Please contact the primary analyst listed in the first page of this report to view previous investment recommendations published by DBS Bank Ltd, DBS Vickers Securities (Singapore) Pte Ltd (''DBSVS''), their subsidiaries and/or other affiliates in the preceding 12 months.
1 An associate is defined as (i) the spouse, or any minor child (natural or adopted) or minor step-child, of the analyst; (ii) the trustee of a trust of which the analyst, his spouse, minor child (natural or adopted) or minor step-child, is a beneficiary or discretionary object; or (iii) another person accustomed or obliged to act in accordance with the directions or instructions of the analyst. 2 Financial interest is defined as interests that are commonly known financial interest, such as investment in the securities in respect of an issuer or a new listing applicant, or financial accommodation arrangement between the issuer or the new listing applicant and the firm or analysis. This term does not include commercial lending conducted at arm's length, or investments in any collective investment scheme other than an issuer or new listing applicant notwithstanding the fact that the scheme has investments in securities in respect of an issuer or a new listing applicant.
Page 52
Industry Focus Indonesia Cigarettes
RESTRICTIONS ON DISTRIBUTION General This report is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation.
Australia This report is being distributed in Australia by DBS Bank Ltd, DBSVS or DBSV HK. DBS Bank Ltd holds Australian Financial Services Licence no. 475946.
DBSVS and DBSV HK are exempted from the requirement to hold an Australian Financial Services Licence under the Corporation Act 2001 (“CA”) in respect of financial services provided to the recipients. Both DBS Bank Ltd and DBSVS are regulated by the Monetary Authority of Singapore under the laws of Singapore, and DBSV HK is regulated by the Hong Kong Securities and Futures Commission under the laws of Hong Kong, which differ from Australian laws.
Distribution of this report is intended only for “wholesale investors” within the meaning of the CA.
Hong Kong This report has been prepared by an entity(ies) which is not licensed by the Hong Kong Securities and Futures Commission to carry on the regulated activity of advising on securities pursuant to the Securities and Futures Ordinance (Chapter 571 of the Laws of Hong Kong). This report is being distributed in Hong Kong and is attributable to DBS Bank (Hong Kong) Limited, a registered institution registered with the Hong Kong Securities and Futures Commission to carry on the regulated activity of advising on securities pursuant to the Securities and Futures Ordinance (Chapter 571 of the Laws of Hong Kong).
For any query regarding the materials herein, please contact Carol Wu (Reg No. AH8283) at [email protected]
Indonesia This report is being distributed in Indonesia by PT DBS Vickers Sekuritas Indonesia.
Malaysia This report is distributed in Malaysia by AllianceDBS Research Sdn Bhd ("ADBSR"). Recipients of this report, received from ADBSR are to contact the undersigned at 603-2604 3333 in respect of any matters arising from or in connection with this report. In addition to the General Disclosure/Disclaimer found at the preceding page, recipients of this report are advised that ADBSR (the preparer of this report), its holding company Alliance Investment Bank Berhad, their respective connected and associated corporations, affiliates, their directors, officers, employees, agents and parties related or associated with any of them may have positions in, and may effect transactions in the securities mentioned herein and may also perform or seek to perform broking, investment banking/corporate advisory and other services for the subject companies. They may also have received compensation and/or seek to obtain compensation for broking, investment banking/corporate advisory and other services from the subject companies.
Wong Ming Tek, Executive Director, ADBSR
Singapore This report is distributed in Singapore by DBS Bank Ltd (Company Regn. No. 196800306E) or DBSVS (Company Regn No. 198600294G), both of which are Exempt Financial Advisers as defined in the Financial Advisers Act and regulated by the Monetary Authority of Singapore. DBS Bank Ltd and/or DBSVS, may distribute reports produced by its respective foreign entities, affiliates or other foreign research houses pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Where the report is distributed in Singapore to a person who is not an Accredited Investor, Expert Investor or an Institutional Investor, DBS Bank Ltd accepts legal responsibility for the contents of the report to such persons only to the extent required by law. Singapore recipients should contact DBS Bank Ltd at 6327 2288 for matters arising from, or in connection with the report.
Page 53
Industry Focus Indonesia Cigarettes
Thailand This report is being distributed in Thailand by DBS Vickers Securities (Thailand) Co Ltd.
United This report is produced by PT DBS Vickers Sekuritas Indonesia which is regulated by the Otoritas Jasa Keuangan (OJK). Kingdom This report is disseminated in the United Kingdom by DBS Vickers Securities (UK) Ltd, ("DBSVUK"). DBSVUK is authorised and regulated by the Financial Conduct Authority in the United Kingdom.
In respect of the United Kingdom, this report is solely intended for the clients of DBSVUK, its respective connected and associated corporations and affiliates only and no part of this document may be (i) copied, photocopied or duplicated in any form or by any means or (ii) redistributed without the prior written consent of DBSVUK. This communication is directed at persons having professional experience in matters relating to investments. Any investment activity following from this communication will only be engaged in with such persons. Persons who do not have professional experience in matters relating to investments should not rely on this communication.
Dubai This research report is being distributed by DBS Bank Ltd., (DIFC Branch) having its office at units 608 - 610, 6th Floor, International Gate Precinct Building 5, PO Box 506538, DIFC, Dubai, United Arab Emirates. DBS Bank Ltd., (DIFC Branch) is regulated Financial by The Dubai Financial Services Authority. This research report is intended only for professional clients (as defined in the Centre DFSA rulebook) and no other person may act upon it.
United Arab This report is provided by DBS Bank Ltd (Company Regn. No. 196800306E) which is an Exempt Financial Adviser as Emirates defined in the Financial Advisers Act and regulated by the Monetary Authority of Singapore. This report is for information purposes only and should not be relied upon or acted on by the recipient or considered as a solicitation or inducement to buy or sell any financial product. It does not constitute a personal recommendation or take into account the particular investment objectives, financial situation, or needs of individual clients. You should contact your relationship manager or investment adviser if you need advice on the merits of buying, selling or holding a particular investment. You should note that the information in this report may be out of date and it is not represented or warranted to be accurate, timely or complete. This report or any portion thereof may not be reprinted, sold or redistributed without our written consent.
United States This report was prepared by PT DBS Vickers Sekuritas Indonesia (''DBSVI''). DBSVUSA did not participate in its preparation. The research analyst(s) named on this report are not registered as research analysts with FINRA and are not associated persons of DBSVUSA. The research analyst(s) are not subject to FINRA Rule 2241 restrictions on analyst compensation, communications with a subject company, public appearances and trading securities held by a research analyst. This report is being distributed in the United States by DBSVUSA, which accepts responsibility for its contents. This report may only be distributed to Major U.S. Institutional Investors (as defined in SEC Rule 15a-6) and to such other institutional investors and qualified persons as DBSVUSA may authorize. Any U.S. person receiving this report who wishes to effect transactions in any securities referred to herein should contact DBSVUSA directly and not its affiliate.
Other In any other jurisdictions, except if otherwise restricted by laws or regulations, this report is intended only for qualified, jurisdictions professional, institutional or sophisticated investors as defined in the laws and regulations of such jurisdictions.
Page 54
Industry Focus Indonesia Cigarettes
DBS Regional Research Offices
HONG KONG MALAYSIA SINGAPORE DBS (Hong Kong) Ltd AllianceDBS Research Sdn Bhd DBS Bank Ltd Contact: Carol Wu Contact: Wong Ming Tek (128540 U) Contact: Janice Chua 11th Floor The Center 19th Floor, Menara Multi-Purpose, 12 Marina Boulevard, 99 Queen’s Road Central Capital Square, Marina Bay Financial Centre Tower 3 Central, Hong Kong 8 Jalan Munshi Abdullah 50100 Singapore 018982 Tel: 852 3668 4181 Kuala Lumpur, Malaysia. Tel: 65 6878 8888 Fax: 852 2521 1812 Tel.: 603 2604 3333 Fax: 65 65353 418 e-mail: [email protected] Fax: 603 2604 3921 e-mail: [email protected] e-mail: [email protected] Company Regn. No. 196800306E
THAILAND INDONESIA DBS Vickers Securities (Thailand) Co Ltd PT DBS Vickers Sekuritas (Indonesia) Contact: Chanpen Sirithanarattanakul Contact: Maynard Priajaya Arif 989 Siam Piwat Tower Building, DBS Bank Tower 9th, 14th-15th Floor Ciputra World 1, 32/F Rama 1 Road, Pathumwan, Jl. Prof. Dr. Satrio Kav. 3-5 Bangkok Thailand 10330 Jakarta 12940, Indonesia Tel. 66 2 857 7831 Tel: 62 21 3003 4900 Fax: 66 2 658 1269 Fax: 6221 3003 4943 e-mail: [email protected] e-mail: [email protected] Company Regn. No 0105539127012 Securities and Exchange Commission, Thailand
Page 55