Election Catalyst In 2014
We believe the cigarette sector will benefit from rising consumer spending
during next year’s election. Historical data suggests that excise duty purchase
and national production growth are robust during
election periods. This in turn, should bode well for GGRM and
WIIM. Our Top Pick is GGRM for its strong market position and signs of recovery.
GGRM has underperformed the market by 28% ytd and is trading at a 30% discount
to its 3 years historical forward P/E.
¨ Strong growth in historical election periods. Based on excise duty purchase volume
from 2002-2012, cigarette volume recorded the fastest growth during the
election periods in 2004 (+10.1% y-o-y) and 2009 (14.2% y-o-y). This was mainly
spurred by the growth in machine rolled cigarettes (SKM) excise duty purchase,
which increased by 14.9%/18.2% y-o-y in 2004/2009 respectively. By contrast,
excise duty purchase growth in non-election years was in the range of -3.0% to
7.7% y-o-y (see Figure 1). The strong excise duty purchase growth during the election
period is typically correlated with strong national production growth (see
Figure 2). Therefore, we believe the upcoming election in 1H14 would boost
industry cigarette sales in 2014-15, as pump priming activities is expected to
boost cigarette consumption.
¨ Strong SKM exposure to benefit from election. We see that companies with strong
exposure to SKM products especially in the mild product segment will benefit
the most from the election boost as demand for SKM products typically grows
faster than that of other cigarette types. Wismilak Inti Makmur (WIIM, BUY, TP:
IDR1,000)’s 9M13 SKM revenue accounted for ~86% of its cigarette revenue, while
Gudang Garam (GGRM, BUY, TP: IDR46,500)’s 9M13 SKM revenue made up 90% of its
total cigarette revenue. It is worth noting that GGRM’s 9M13 sales volume
growth for the mild segment outpaced that of the industry (GGRM: +33% y-o-y;
industry: +5.3% y-o-y). We expect GGRM and WIIM to book 2014-15 aggregate
revenue growth of 13.1% and 11.4% yo-y respectively.
¨ Solid fundamentals; good entry point. We like GGRM for its strong position
in the industry and signs of recovery. GGRM is trading at a 30% discount to
its 3-year historical forward P/E. Meanwhile, we like WIIM’s strong business
growth from its low base position. We note that there is a mispricing in the
market against both companies’ solid fundamentals.
source: RHB OSK dated 11 December 2013
