INVESTOR DIGEST Equity Research | 17 February 2020 Economic Data HIGHLIGHT Latest 2020F • Gudang Garam: The Seventh Price Increase (GGRM; Rp54,575; Buy; TP:Rp63,450) 7-DRRR (%), eop 5.00 4.75 • Market Recap 14th January; JCI 5866.95 points -5.01 Pts (-0.09%); Valued $351mn; Inflation (YoY %) 2.68 3.30 Mkt Cap $477bn; USD/IDR 13,701 US$ 1 = Rp, period avg 13,701 14,296 Stock Market Data CORPORATE (xx February 2020) Gudang Garam: The Seventh Price Increase (GGRM; Rp54,575; Buy; JCI Index 5,866.9 -0.09% TP:Rp63,450) Trading T/O ( Rp bn ) 4,760.5 Market Cap ( Rp tn ) 6,781.8 GGRM announced its seventh ex-factory price increase that will be effective on Feb 24, averaging at 6.2% across seven SKUs within low-priced SKT and premium SKM products. Wholesalers have begun speculating for price adjustment across Market Data Summary* GGRM’s low-priced SKUs over the next one-to-two weeks. 2020F 2021F Seventh price increase coming up on Feb 24. Notified over the weekend, GGRM will conduct its seventh ex-factory price increase on Feb 24, involving P/E (x) 15.7 14.2 low-priced hand-rolled cigarettes (SKT) and premium machine-rolled cigarettes P/BV (x) 2.3 2.1 (SKM). This is in-line with what we have highlighted two weeks ago (see reports: EV/EBITDA (x) 13.2 12.3 here) that GGRM will raise prices on a weekly basis in accordance to the Div. Yield (%) 2.9 3.1 depleting 2019 excise tariff ribbons. Feb 24’s price increases are as follow: GG Net Gearing (%) 23.5 20.4 Mild Shiver (+9.5%), Halim (+8.2%), Halim Coklat (+8.2%), Surya Exclusive (+8%), ROE (%) 14.8 15.4 Signature Coklat 12 (+4.4%), GG Deluxe (+2.9%), and Djaja (+2.4%). These EPS Growth (%) 3.9 10.3 products have high single digit volume mix contribution. EBITDA Growth (%) 5.2 6.2 More increases ahead. GGRM has been the most aggressive tier-one producer Earnings Yield (%) 6.4 7.0 in passing-on 2020 excise tariffs, understandably given its superior market share outperformance in the last two years. By Feb 24, GGRM would have delivered * Aggregate of 75 companies in MS research universe, representing 63.4%of JCI’s market capitalization 10.2% average price increases across 21 SKUs, ranging from 7%-16% for the premium SKM products and 10-20% for the low-priced SKM (refer to Figure 1). Wholesalers have begun speculating that GGRM will increase its low-priced products within dthe next one-to-two weeks, understandably as we are approaching the end-March deadline for price floor compliance. Competitor Djarum will deliver its fourth ex-factory price hike. This will be similarly timed on Feb 24 but with a much lower magnitude at 2.7% on average across its white cigarettes (SPM), low-priced low-tar-low-nicotine (LTLN) and mid-tar-mid-nicotine (MTMN) cigarettes. The increases are as follow: Insta 16 (+3.5%), Envio Kretek 12 (+3.4%), Super MLD 16 (+3.1%), all Forte variants (+2.9%), Super MLD Black Series 16 (+2.8%), Mustang 12 (+2.7%), Mr Brown 12 (+2.7%), Djarum Super 50 (+2.5%), Super MLD 12 (+2.4%), Super MLD Black Series 12 (+2.3%), LA Bold 12 (+2.3%) and Djarum Coklat Filter 12 (+2.2%). Please see important disclosure at the back of this report Page 1 of 7 Equity Research | 17 February 2020 Buy rating with Rp63,450 PT. We understand that volume should decline this year given the excessive price increases that should be conducted within the lower-price brands. To some extent, GGRM’s decision in aggressively increasing its premium brands’ in the past three rounds of ex-factory hikes should support profitability margins going forward. We will review our forecast assumptions after we have more color on 4Q19/1Q20 volume. GGRM’S HISTORICAL PRICE INCREASES SINCE MAY 2019 Product 1-May-19 2-Sep-19 30-Sep-19 11-Nov-19 13-Jan-20 10-Feb-20 17-Feb-20 24-Feb-20 Total GG Merah 12 1.3% 1.3% Surya Coklat 16 1.5% 1.9% 1.4% 2.3% 7.1% Surya Merah 12 1.7% 2.0% 1.7% 6.5% 11.9% GG Merah 10 2.7% 2.1% 4.8% International 12 1.6% 2.2% 2.8% 6.6% International 50 2.5% 2.4% 3.1% 8.0% Surya Merah 50 2.6% 10.0% 12.6% Pro 16 3.6% 2.1% 2.7% 8.7% 17.2% Pro Mild 16 3.6% 2.1% 2.7% 8.7% 17.2% Surya Coklat 12 1.8% 2.8% 2.4% 9.4% 16.4% GG Mild 16 3.4% 3.3% 7.6% 14.3% GG Mild Shiver 16 3.3% 7.0% 9.5% 19.8% Surya Exclusive 16 3.4% 2.5% 8.0% 13.8% Djaja 12 1.5% 2.4% 3.9% Sriwidari 1.5% 2.4% 3.9% Signature Mild 9.7% 9.7% GG Move 10.2% 10.2% GG Signature 12 2.1% 4.4% 6.5% Halim 4.5% 8.2% 12.7% Halim Coklat 4.5% 8.2% 12.7% GG Deluxe 2.9% 2.9% Simple average 2.6% 2.2% 3.2% 4.5% 4.5% 7.3% 4.0% 6.2% 10.2% Source: Mandiri Sekuritas survey Adrian Joezer (+6221 5296 9415) [email protected] Riyanto Hartanto (+6221 5296 9488) [email protected] Lakshmi Rowter (+6221 5296 9549) [email protected] MARKET Market Recap 14th January; JCI 5866.95 points -5.01 Pts (-0.09%); Valued $351mn; Mkt Cap $477bn; USD/IDR 13,701 TOP TURNOVER: BBCA BBRI TLKM ASII BBNI BMRI UNTR PGAS EXCL UNVR GGRM ICBP BRPT SSMS TOWR PTBA ADRO (55%) ADVANCING SECTOR: cement+3.4%; consumer+0.3%; plantation+0.2%; property & telco+0.1% DECLINING SECTOR: construction-1.6%; financial-0.6%; mining-0.3%; auto-0.2% Indo shares eased and the IDR poised for a third weekly loss as investors were spooked by a sharp rise in the number of coronavirus cases in China this week while oil prices extended gains on hopes of more production cuts. US stock futures shed 0.07% in Asia, after the S&P 500 lost 0.16%. With Japan confirmed its first coronavirus death on Thursday, a third case outside mainland China after two previous fatalities in Hong Kong and the Philippines, investors will surely avoid Asia for the time being and will shift funds to the US, geographically the most separated from the region, meaning more demand for the USD in the currency exchange market. The DXY hit a four-month high, having risen 1.8% so far this month. The JCI lost 0.1% at 5866 level, with BBCA contributing the most to the decline, declining 1.6%. Market turnover (excluding $8.3MN MKPI crossing) was better at $351MN. Foreign participants rose to 35% and came up better seller for Please see important disclosure at the back of this report Page 2 of 7 Equity Research | 17 February 2020 26%. Losers beat gainers by 12 to 10. The IDR weakened against the USD from 13696 to 13701 level, while the benchmark 10-year bond fell and the yield rose 0.5 bps to 6.580%. Global funds bought a net $8.8MN in Indonesian bonds on Feb 12th; and bought a net $3.6MN in country’s equities on Feb 13th. So far this week, the JCI fell 2.2%. It declined 8.6% in the past 52 weeks. The MSCI AC Asia Pacific Index gained 8.6% in the same period. It is now 11.6% below its 52-week high on April 18, 2019 and 1.7% above its low on May 20, 2019. It is trading at a PER of 18.2x on a trailing basis and 14.0x estimated earnings of its members for the coming year. Its dividend yield is 2.6% on a trailing 12-month basis. Its members have a total market capitalization of IDR6.82 quadrillion. The 30-day price volatility fell to 11.13% compared with 11.40% in the previous session and the average of 10.14% over the past month. Sales Team +6221 527 5375 FROM THE PRESS Government targets the groundbreaking for Kediri Airport in April 2020 Budi Karya Sumadi, Minister of Transportation, said the Government and Gudang Garam (GGRM) agreed to finish the first phase of airport construction in 2 years with total investment cost of Rp9.2trn. Budi added that the election of airport management will be handed fully to GGRM. Airport management can be collaborated with PT Angkasa Pura I and PT Angkasa Pura II, or a consortium formed by GGRM. Further, Ministry of Transportation will give GGRM the concession rights as long as 30 to 50 years. (Investor Daily) Cigarettes Excise Revenue Jumped by 1,093% YoY as of February 11 The Finance Ministry recorded the excise and duty revenue reached Rp 9.79 tn as of February 11 in which the forestalling activity and the increase of excise tariff boosted the cigarettes excise revenue to Rp 5.05 tn (1,093% YoY). Meanwhile, the import and export duty registered Rp 3.88 tn (-3.5% YoY) and Rp 0.28 tn (-35.0%) revenue, respectively. (Kontan) Djarum Group has increased shares in SMN Djarum Group, through PT Sapta Adhikari Investama, has increased shares in Sarana Menara Nusantara (TOWR IJ).