Recent price hikes send a positive
signal; valuations attractive
Raising prices by c. 3% recently, including for repackaged
brands and mild
GGRM has increased prices by c. 3% in the past two months,
bringing the year to date price hikes to c. 8%. More encouragingly, GGRM has
hiked prices for its Filter International brand (second largest brand at c. 20%
of volumes) by 4% in the past two months (8% ytd), the first increase since May
- signaling that volumes have stabilized and are starting to recover post the
repackaging fiasco. GGRM’s price hike this year has been led by the 11% hike in
its main brand Surya (c. 38% of volumes), which has seen strong volume growth partially
due to smokers switching from Filter International. Meanwhile, it has also
increased the price of its two mild brands (c. 12% of volumes) by c. 2% in Nov.,
including for its newly introduced GG Mild. This is a positive sign as GG Mild
has only been sold for seven months and typically new brands have the same
introductory price for a prolonged period, such as the successful Surya Pro
Mild brand, which maintained the same price for 18 months.
Strong volume growth even with the price hikes and repackaging
impact
GGRM’s price hikes is driven primarily by its strong volumes
growing by 5% as of 9M13 (vs. industry’s 2% and Sampoerna’s 3%), with growth in
mild category at 33% (vs. industry’s 5% and Sampoerna’s 11%) and full flavor category
at 6% (vs. industry’s 4%) – indicating market share expansion.
We reiterate Buy on GGRM; trading at 26% discount to its
historical PER
The stock is currently trading at 15x FY14F PER, a 26 % discount
to its 4-year average PER, a 36% discount to Indonesian consumers, and 40%
discount to India’s
ITC (Buy; INR320.96). GGRM has been the worst performing large-cap stock in Indonesia with
the share price down by 35% YTD and foreign ownership at 46% of the free-float
at a one-year low. We believe most of the negative news has been priced in and
the market currently has low expectations for this company. As such we
reiterate our Buy on GGRM.
Source:
Deutsche Bank
Markets Research
Dated 21 Nov 2013
