Gudang Garam (GGRM IJ) - TP Rp67,000

Stock: Gudang Garam (GGRM IJ)
Market cap: US$11b
Rec, TP: BUY, Rp67,000/sh

Summary (results were slightly below ours and consensus)
- Revenue Rp41.9tn (+11% y/y, +6% q/q) – 100% of ours and consensus
- Ebit Rp6.8tn (+17% y/y, -22% q/q) – 96% of ours and consensus
- Net profit Rp4.9tn (+18% y/y, -26% q/q) – 97% of ours and 96% of consensus

Comment
- Top-line growth of 11% y/y was mainly driven by price increase, albeit relatively weaker if we compare to other listed cigs players like Bentoel (RMBA IJ) with 13% y/y growth and Sampoerna (HMSP IJ)’s 22%
- Gross margin fell significantly to 23% in 4Q11, from 26% in 3Q11 – due to larger than expected tobacco purchase in 4Q11. Though it might provide margin pressure in the near-term, this would be a buffer if bad tobacco harvest happens like in 2010
- Inventory went up by 44% y/y to Rp21tn and as GG employ moving-average costing, it translates to raw material cost directly. We expect this situation to continue in 1Q12, until they are able to purchase clove and tobacco at lower price (assuming good harvest in Apr/May for clove while Sep for tobacco).
- Ads spending was 4% ahead of our estimates, up +69% q/q in 4Q11 to Rp499bn which lead to FY11 ad/promotional expense to Rp1.4tn or 3% of company’s sales.
- Ebit margin consequently decline to 14% in 4Q11, from 19% in 3Q11. On yearly basis, their Ebit margin was pretty stable at 16% as per FY11.
- Though margin pressure couple with inflation concern might weigh on the stock in the near-term, we believe its strong fundamental with continued aggressive effort to grab market share in mild cigs category should sustain the stock in mid/longer term.
- GG trades at 18x 2012 P/E, lower than average consumer peers’ 22x. Our forecast and recommendation are under review.

Source: CLSA Indonesia