Wismilak
Inti Makmur (WIIM; BUY; TP:IDR1,050): Initiation coverage - Smoking Hot
Stock
Wismilak
Inti Makmur’s (WIIM) share price, which has shot up by 25% in just two days
since Tuesday, still provides an attractive 30% potential upside to our IDR1,050
TP which implies to 15.9x-10.1x FY13-14F earnings multiple. WIIM is currently
trading at 12.3x and 7.8x 2013 and 2014 PERs respectively, representing 39% and
57% discounts to industry leader Gudang Garam (GGRM), and 33% and 51% discounts
to our consumer sector PE. We believe the company's strong earnings growth of
91% y-o-y and 58% y-o-y in 2013 and 2014 respectively, together with its very
low 2013 PEG of 0.1x, make WIIM a compelling bargain. However, investors making
a beeline for this bargain stock should take into consideration: i) execution
risks, and ii) the discount factor in view of an expected margin squeeze in
2015 for WIIM’s SKM products as it would then be fully exposed to the tier-1
excise tax bracket. BUY.
Strong
volume growth.
Wismilak Diplomat's weekly sales have been on an uptrend on a y-o-y basis
(please refer to Exhibit 1) and we expect full year SKM regular sales
volume to reach FY12 target of 727m tonnes (12% y-o-y). Sales of its mild
product, under the Diplomat Mild brand launched in September this year, almost
tripled that of Galan Mild in the initial 12 weeks of its respective launching
dates. We expect its Diplomat Mild and Galan Mild sales volume to reach FY12
target. Given strong 2013 aggregates sales volume and ASP growth coupled with
lower excise tax growth in 2013, we see a strong jump in 2013 net profit (+91%
y-o-y).
Far
from being a sunset industry.
Indonesia’s cigarette production booked in a 7.6% CAGR from 2007-2011. Of the
nation’s total production, clove machine-made cigarettes (SKM; ~65% market
share) chalked up an 11.2% CAGR from 2007–2011. This rapid growth was powered by
the increase in the company's market share of SKM mild products to 35%, from 23%
in 2007. As the industry leans towards SKM mild products, competition for market
share among cigarette players should become increasingly
intense.
Outperforming
the industry.
WIIM has the capacity to expand throughout Indonesia, where there is vast growth
potential as well as strong demand for cigarettes. Riding on the successful
launch of the Galan Mild brand in 2010, the company’s SKM mild product sales
have soared by a 199% CAGR from 2007 to 2011. At this point of time, WIIM has
passed the learning curve for mild cigarettes and expects its recently-launched
Diplomat Mild brand to be the next big hit. We expect its anchor brand, Wismilak
Diplomat, to experience sustainable growth due to its strong and
well-established brand equity.
