EQUITY RESEARCH HMSP – Company Update - 10 May 2019 CIPTADANA SEKURITAS ASIA BUY HM SAMPOERNA TP: Rp4,200 (+18.3%) New products to compete Sector Cigarette New Sampoerna A Splash to drive higher market share In 2Q19, HM Sampoerna (HMSP) launched new Sampoerna A Splash, new low tar low Bloomberg Ticker HMSP IJ nicotine (LTLN) machine-made cigarette to strengthen A mild product portfolio. After losing significant sales volume in SKM (-8.4% YoY and –24% QoQ in 1Q19 , at end of April Share Price Performance HMSP launched A Splash in two flavors Tropical and Sunny. We view that A Splash will Last price (Rp) 3,550 compete with particularly KT&G Esse Brand as those brands containing same amount of Avg. daily T/O (Rpbn/USDmn) 100.3/7.0 tar and nicotine (12 mg tar and around 0.8 mg of nicotine). We believe, Esse Brand particularly targets at female smokers by using the more feminine theme, such as “slim”, 3m 6m 12m ”extra-slim”, ”light”, “slender”, “sweet” introducing slimmer sticks and fruity flavors. Esse Absolute (%) -5.3 7.6 -4.3 distinctive characteristic and feminine touch gained popularity especially for women. While Sampoerna A Splash are more neutral in their ads and promotions and didn’t Relative to JCI (%) -0.4 0.3 -10.4 specifically adopt the slim feminine touch, enabling HMSP to have a broader target 52w High/Low price (Rp) 4,080/3,240 markets. Higher tax bracket, push HMSP to sell products at expensive ASP 6,000 20% In terms of price, Esse still benefits from the Indonesia excise tax policy by paying tier 2 15% 5,000 excise tax at Rp715-895/sticks vs. HMSP that pay tier 1 tax layer at Rp 1,120/stick. Thus, 10% Esse Change able to sell its product at Rp 20,000/20 sticks much cheaper than A Splash at 4,000 5% Rp 23,500/16 sticks. Nevertheless, we still expect new Sampoerna A Splash allows HMSP 3,000 0% to book higher sales growth as it will be the only competitor for Esse fruity-flavored SKM -5% 2,000 and also offers completely different taste to A-mild portfolio. We project SKM division to -10% become a top contributor for HMSP in 2019 with 6.3% sales growth and higher 1,000 -15% contribution towards HMSP revenue by 70%(+0.5%YoY) in 2019F. 0 -20% Rebranding strategy and enter the lower priced product segment 18 17 17 17 17 17 18 17 17 18 17 18 17 - - - - - - - - - - - - - Judging from Indonesia cigarette sales volume, SKM high tar is the segment that Jul Oct Jan Apr Apr Jun Feb Dec Sep Nov Aug Mar May experienced the fastest growth since 2015. HMSP also realized that the widened price gap HMSP 1yr Rel. to JCI (RHS) between its products to competitors’ might not a good strategy in the long term. Hence, in order to capture the lower-income segment in February HMSP also rebrand the previous Outstanding shrs (mn) 116,318 U-Bold to Philip Morris Bold with black and red packaging. HMSP hopes the rebranding Mkt. Cap (Rpbn/USDmn) 412,929/28,755 strategy enable Philip Morris Bold to bring more luxurious feeling but can be enjoyed at an affordable price at Rp 1,000/stick or Rp 12,000/pack. While Marlboro Filter Black used to Estimated free float (%) 7.5 be considered as one of the most expensive SKM FF in the market (avg. Rp 24,500/pack Major shareholders with 20 sticks) also launch smaller pack of Rp 14,000/pack with 12 sticks to compete with lower price product. Further, to catch up the decreasing volume during Ramadhan, HMSP PT Philip Morris Indonesia 92.5% also launched special edition (10+2) on SKT Sampoerna Hijau, this means 1 pack of Public 7.5% Sampoerna Hijau consists of 10 sticks of it+ 2 additional Dji Sam Soe sticks, at no additional cost. Maintain BUY recommendation with TP of Rp4,200/share EPS Consensus We maintain our BUY rating on HMSP, as our TP of Rp 4,200 still offers 18.3% upside Ciptadana Cons. % Diff potential from current price. HMSP currently trades at 2019F PER of 29x. Yesterday, HMSP announced to pay out a cash dividend of Rp 117.2/share (+9.2%YoY) translating to 100.7% 2019F 119.9 128.6 -6.8 dividend payout ratio (from 2018 earnings) and 3.3% yield. Besides, we also saw gain in 2020F 125.6 138.9 -9.6 cigarettes stocks on the expectation that the government may delay excise tax increase until next year. 2021F 145.7 153.1 -4.8 Exhibit 1 : Financial Highlights Year to 31 Dec 2017A 2018A 2019F 2020F 2021F Revenue (Rpbn) 99,091 106,742 110,467 117,184 128,827 Operating profit (Rpbn) 16,111 16,882 17,927 18,703 21,767 Net profit (Rpbn) 12,671 13,538 13,949 14,610 16,950 EPS (Rp) 108.9 116.4 119.9 125.6 145.7 Stella Amelinda EPS growth (%) -0.7 6.8 3.0 4.7 16.0 EV/EBITDA (x) 23.3 21.8 20.3 20.0 17.3 +62 21 2557 4800 ext. 740 [email protected] PER (x) 31.9 29.9 29.0 27.7 23.9 PBV (x) 11.9 11.4 11.4 11.0 11.0 Dividend yield (%) 3.1 3.1 3.4 3.5 4.1 http://www.ciptadana.com ROE (%) 37.1 38.3 39.2 39.9 45.9 Source : HMSP, Ciptadana Estimates Please see analyst certification and other important disclosures at the back of this report 2 EQUITY RESEARCH HMSP – Company Update - 10 May 2019 CIPTADANA SEKURITAS ASIA Exhibit 2: HMSP Sampoerna A-splash and Sampoerna Hijau Source: Bloomberg and Ciptadana Sekuritas Asia Exhibit 3: Marlboro Filter Black and Philip Morris Bold Source: Company Exhibit 4: HMSP Quarterly Performance 35,000 30.00% 30,000 25.00% 25,000 20.00% 20,000 15.00% 15,000 Revenue (Rpbn) 10.00% 10,000 Gross Margin 5,000 5.00% Operating Margin 0 0.00% Net Margin 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 1Q18 2Q18 3Q18 4Q18 1Q19 Source: Company, Ciptadana Sekuritas Asia Please see analyst certification and other important disclosures at the back of this report 3 EQUITY RESEARCH HMSP – Company Update - 10 May 2019 CIPTADANA SEKURITAS ASIA Exhibit 5: HMSP PE Band 6000 5000 39.3x 4000 32.9x 26.4x 3000 19.9x 2000 13.5x 1000 0 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 Jan-19 Source: Bloomberg and Ciptadana Sekuritas Asia Please see analyst certification and other important disclosures at the back of this report 4 EQUITY RESEARCH HMSP – Company Update - 10 May 2019 CIPTADANA SEKURITAS ASIA Exhibit 6 - Income Statement Year to 31 Dec (Rpbn) 2017A 2018A 2019F 2020F 2021F Revenue 99,091 106,742 110,467 117,184 128,827 COGS -74,876 -81,251 -82,836 -87,806 -95,445 Gross profit 24,216 25,491 27,632 29,378 33,382 Oper. expenses -8,104 -8,609 -9,705 -10,675 -11,615 Oper. profit 16,111 16,882 17,927 18,703 21,767 EBITDA 16,976 17,835 18,795 19,573 22,639 Interest income 817 1,004 773 937 902 Interest expense -26 -30 -44 -47 -52 Other income (exp.) -8 106 -62 -18 -24 Pre-tax profit 16,895 17,961 18,593 19,575 22,594 Income tax -4,224 -4,423 -4,644 -4,966 -5,644 Minority interest 0 0 0 0 0 Net profit 12,671 13,538 13,949 14,610 16,950 Exhibit 7 - Balance Sheet Year to 31 Dec (Rpbn) 2017A 2018A 2019F 2020F 2021F Cash & cash equivalent 9,876 16,790 23,096 14,133 12,517 Acct, receivables 3,598 3,508 3,630 3,853 4,235 Inventory 18,023 15,183 12,398 20,046 22,034 Other curr, asset 2,683 2,350 3,627 3,848 4,230 Total current asset 34,180 37,831 42,751 41,879 43,017 Fixed assets - net 6,891 7,288 7,420 7,550 7,678 Other non-curr.asset 1,525 947 978 1,034 1,131 Total asset 43,141 46,602 51,703 51,050 52,472 ST debt + curr. maturity 29 34 38 42 46 Acct, payable 3,666 3,450 5,145 5,779 6,353 Advances received 0 0 0 0 0 Other curr. liab 2,788 5,310 6,345 3,850 4,153 Long term debt 306 248 273 300 330 Other non-curr, liab, 2,239 2,202 4,289 4,428 4,668 Total liabilities 9,028 11,244 16,090 14,398 15,550 Shareholder equity 34,113 35,358 35,615 36,654 36,924 Minority interest 0 0 0 0 0 Total liab + SHE 43,141 46,602 51,705 51,052 52,474 Exhibit 8- Per Share Data (Rp) 2017A 2018A 2019F 2020F 2021F EPS 108.9 116.4 119.9 125.6 145.7 BVPS 293.3 304.0 306.2 315.1 317.4 DPS 107.7 107.7 117.7 123.3 143.0 FCF per share 128.9 176.0 168.5 53.1 129.7 Source : HMSP, Ciptadana Estimates Please see analyst certification and other important disclosures at the back of this report 5 EQUITY RESEARCH HMSP – Company Update - 10 May 2019 CIPTADANA SEKURITAS ASIA Exhibit9 - Cash Flow Year to 31 Dec (Rpbn) 2017A 2018A 2019F 2020F 2021F Net income 12,671 13,538 13,949 14,610 16,950 Depreciation 865 953 868 870 872 Chg in working cap.