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Stock Index
Bahana Securities

26 Sep 2018 | 13:20 WIB
INDEX
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%
COMPOSITE
5.867,577
-14,643
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IDX30
506,315
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Currencies
Bahana Securities

26 Sep 2018 | 13:20 WIB
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Tobacco sector: Lighting up

For Indonesia’s tobacco sector, we are beginning to see some light for next year. In the 2017 Budget (RAPBN), the government is budgeting only a 6% increase in tobacco excise revenue to IDR149.9tn (exhibit 1) from 2016F’s 15% excise hike for a target of IDR142tn. In our view, 2016’s huge ASP adjustments following the 15% excise tax jump will result in slower-than-expected industry volume growth (2016F: -1 to -2% y-y). Furthermore, 7M16 realisation excise revenue only accounted for 37% of 2016’s FY target.

Even if we include the 2M16 excise revenue this year, only 49% of the FY target would be reached, or about 6% lower than the 7M14-15 average. Therefore, we believe the 2017F excise hike would reach around 10-12% higher y-y instead of just 6%.

In terms of stick sales, the post-Lebaran festivities’ 2.4% m-m volume growth may still result in the government’s inability to meet the 2016 excise revenue target, unless the directorate general of excise decided to implement a similar move to book excise receipts 2 months in advance as was performed at end-2015.

Going into 2017F, although the excise tax hike should be lower than in 2016F, we believe the competition is still tough this year with BAT’s aggressive moves to take up market share in Indonesia. Thus, we believe that HMSP and GGRM should experience greater difficulties in passing on the higher excise tax ahead. At this stage, we are still awaiting the final cigarette excise tax figure per stick to be announced in October 2016.  

Despite increases in A Mild ASP by 12% ytd, HMSP has maintained its market share of around 33% (exhibit 2), testimony to the company’s high brand equity. This is despite BAT’s 5% discount on its Lucky Strike Mild products at the retail level in the form of extra packs (i.e. 100 packs to obtain 5 extra packs).

On a brighter note, HMSP’s focus on the premium SKM FF segment should help support margins through the launch of the one-of-a-kind “kretek” Marlboro with clove called Marlboro Filter Black. HMSP will produce the product and pay a brand royalty to Phillip Morris Indonesia (PMI), unlike the other Marlboro brands, where HMSP only generates 3-5% distribution margins.

At the stock level, we continue to like HMSP, and maintain our positive view with a higher target price of IDR4,800 as we roll over our valuation to 2017 (20% discount to UNVR at TP). On GGRM, it has increased the price of its Surya ProMild by 3.7% to IDR706/stick, closing the gap to A Mild at IDR1,108/stick. This should help maintain margins. Other positive catalysts for GGRM are its mass-market exposure and undemanding valuation on 2017F PE of 18.6x, a 50% discount to HMSP, with a lower target price of IDR72,300, based on a 2017F PE of 21x.


Michael W Setjoadi
Analyst
Bahana Securities

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