Gudang Garam

(GGRM IJ)
Growing popularity of SKM full-flavor supports
sales volume growth

Growing popularity of SKM full-flavor supports sales volume

Tobacco
Before SKM LTN (mild machine-made cigarettes) were introduced to the market,
Company Report people smoked SKT (hand-rolled cigarettes) more than SKM FF (full-flavor machine
made cigarettes), as they were more affordable and better captured the kretek
October 19, 2018
flavor favored by Indonesians. Now there is a rising trend toward SKM FF, which
GGRM attributes to consumers’ deeper pockets. Consumers are also shifting from
SKT to SKM FF because the flavor is not much different than SKT; the growing
(Maintain) Buy
popularity of SKM FF has much to do with taste and GGRM’s pioneering in this
segment.
Target Price (12M, IDR) 89,000
GGRM’s SKM portion to total revenue grew 82 bps QoQ and 122 bps YoY to 90.7% in
Share Price (10/19/18, IDR) 78,745 2Q18 (vs. 89.9% in 1Q18 and 89.5% in 2Q17). Meanwhile, SKT’s portion to total
revenue dropped 77 bps QoQ and 137 bps YoY to 7.7% in 2Q18 (vs. 8.4% in 1Q18
Expected Return 13.0% and 9% in 2Q17). We expect SKM FF to remain GGRM’s driver of sales volume.

FCF to remain solid

Consensus OP (18F, IDRtr) 12.2 We expect GGRM’s free cash flow to remain solid, despite capex for Kediri airport.
The company expects to pay a lower payout ratio of 65% in 2018F compared to 76%
EPS Growth (18F, %) 9.4
in 2017. It has not decided on the amount to put toward the airport, and hence only
P/E (18F, x) 18.0
guided IDR1-10tr capex for the airport in its latest public release. Regardless, we
Industry P/E (18F, x) 27.6
expect the capex to be amortized over several years. We assume the capex-to-sales
Benchmark P/E (18F, x) 15.3
ratio for 2018F onwards to be 3.3%, with capex amounting to at least IDR3tr.
Market Cap (IDRbn) 150,992.8
Assuming that airport construction is divided over five years, the airport capex will
Shares Outstanding (mn) 1,924.1 be around IDR2tr. We believe this is still manageable, compared to the company’s
Free Float (mn) 457.6 high capex cycle during 2013-15.
Institutional Ownership (%) 82.0
Beta (Adjusted, 24M) 1.3
52-Week Low (IDR) 61,925 GGRM’s lower valuation relative to HMSP is unjustified
52-Week High (IDR) 86,400 We believe the company’s lower valuation relative to HMSP is unjustified in light of
(%) 1M 6M 12M its growing market share (22% as of 1Q18 vs. 21.1% in 1Q17) and strong track
Absolute 5.3 3.5 24.3 record in SKM full-flavor cigarettes, which are preferred in the Indonesian mass
Relative 6.0 11.4 25.6 market nowadays. We reiterate Buy on GGRM with a target price of IDR89,000,
which implies a 2018F P/E of 20.2x. Our target price was derived using a blended
(D-1yr=100)
JCI GGRM target price of DCF with a 7-year life span and target multiple of 19x (+1Std
Deviation). The company is currently trading at 18x 2018F P/E, just slightly above its
140

130

120 5-year average P/E.

110

100

90

80
10/17 12/17 2/18 4/18 6/18 8/18 10/18

PT. Mirae Asset Sekuritas Indonesia FY (Dec.) 12/14 12/15 12/16 12/17 12/18F 12/19F
Consumer Revenue (IDRbn) 65,186 70,365 76,274 83,306 91,463 100,428
Gross Profit (IDRbn) 13,380 15,485 16,617 18,222 19,930 21,808
Christine Natasya Operating Profit (IDRbn) 8,525 9,906 9,972 11,119 12,091 13,223
+62-21-515-1140 (ext.: 233)
Net profit (IDRbn) 5,369 6,426 6,677 7,754 8,483 9,282
natasya@miraeasset.co.id
EPS (IDR) 2,790 3,340 3,470 4,030 4,409 4,824
BPS (IDR) 17,151 19,698 20,522 21,917 23,707 25,665
P/B (x) 4.6 4.0 3.9 3.6 3.3 3.1
P/E (x) 28.5 23.8 22.9 19.7 18.0 16.5
ROE 16.3 17.0 16.9 18.4 18.6 18.8
ROA 9.2 10.1 10.6 11.6 12.2 12.4
Note: NP refers to net profit attributable to controlling interests
Source: Company data, Mirae Asset Sekuritas Indonesia Research estimates
PLEASE SEE ANALYST CERTIFICATIONS AND IMPORTANT DISCLOSURES & DISCLAIMERS IN APPENDIX 1 AT THE END OF REPORT.
 Gudang Garam

Table 1. Machine-rolled cigarettes

Type Tar Nicotine

Lower tar and nicotine (LTLN) 14-15mg 1.0mg
Mid tar nicotine 18-25mg 1.2-1.7mg
Full flavored 31-32mg 1.8-2.2mg
Source: Internet, Mirae Asset Sekuritas Research

Figure 1. Annual gross margin (historical & forecast) Figure 2. Quarterly gross margin

(IDRbn) Gross profit (L) Gross profit margin (R) (IDRbn) Gross profit margin (R) Gross profit (L)

25,000 23% 5,400 24%

23.4%
21.9%
21.8% 22% 5,000
20,000
23%
21% 4,600
15,000

20% 4,200 21%

10,000
19.9%
19% 3,800 19.6%
20%
5,000
18% 3,400

0 17% 3,000 18%

2012 2013 2014 2015 2016 2017 2018 F 2019 F 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 1Q18 2Q18

Source: Company data, Mirae Asset Sekuritas Research Source: Company data, Mirae Asset Sekuritas Research

Figure 3. Revenue breakdown Figure 4. Quarterly OP margin

Paperboard and others Klobot clove cigarettes SKT SKM (IDRbn) Operating profit margin (R) Operating profit (L)

100% 4,000 18%

9.0% 8.7%8.4%7.7%
90%
16%
80% 3,200

70% 14%

60% 2,400
12%
50%
90.7% 10%
10%
40% 89.9% 1,600 9%
89.5%
30% 8%
20% 800
6%
10%
0% 0 4%
1Q15 3Q15 1Q16 3Q16 1Q17 3Q17 1Q18 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 1Q18 2Q18

Source: Company data, Mirae Asset Sekuritas Research Source: Company data, Mirae Asset Sekuritas Research

Mirae Asset Sekuritas Indonesia Research 2

 October 19, 2018

Gudang Garam

GGRM
Income Statement (Summarized) Balance Sheet (Summarized)

Year end Dec 31 (IDRbn) 2016 2017 2018F 2019F IDRbn 2016 2017 2018F 2019F
Revenue 76,274 83,306 91,463 100,428 Assets
COGS 59,657 65,084 71,534 78,620 Cash and equivalents 1,595 2,329 3,056 6,118
Gross Profit 16,617 18,222 19,930 21,808 Receivables 2,090 3,079 3,380 3,711
Opex 6,644 7,103 7,839 8,585 Inventories 37,545 37,920 38,804 39,725
Operating Profit 9,972 11,119 12,091 13,223 Others 703 1,251 1,353 1,472
Other income/(expenses) 109 45 128 72 Total current assets 41,933 44,579 46,593 51,026
Interest income 41 73 70 61 Fixed assets - net 20,499 21,409 22,015 22,717
Interest expense -1,191 -801 -995 -982 Others 520 772 791 818
Profit before income tax 8,931 10,437 11,294 12,374 Total non-current assets 21,018 22,181 22,805 23,535
Income tax expenses -2,258 -2,681 -2,856 -3,129 Total assets 62,952 66,760 69,399 74,561
Minority interest 4 -2 45 37 Liabilities and equity
Net profit 6,677 7,754 8,483 9,282 Short-term bank loans 19,753 20,600 19,207 20,086
and current maturities
EBITDA 12,058 13,363 14,503 15,834 Accounts payables 1,118 1,214 1,391 1,529
Others current liabilities 767 797 1,011 1,148
Growth & margins 2016 2017 2018F 2019F Total current liabilities 21,639 22,611 21,609 22,763
Growth (%) Deferred tax liabilities 371 384 454 497
Revenue 8.4 9.2 9.8 9.8 Others 1,377 1,578 1,660 1,820
EBITDA 3.5 10.8 8.5 9.2 Non-current liabilities 1,749 1,961 2,114 2,317
Net profit 3.9 16.1 9.4 9.4 Total liabilities 23,387 24,572 23,723 25,080
Minority interests 77 17 62 99
Shareholders' equity 39,487 42,171 45,614 49,382
Profitability (%)
Gross margin 21.8 21.9 21.8 21.7
Operating margin 13.1 13.3 13.2 13.2
EBITDA margin 15.8 15.6 15.9 15.8

Cash Flow Ratio analysis

(Summarized) Year end Dec 31 2016 2017 2018F 2019F
Year end Dec 31 (IDRbn) 2016 2017 2018F 2019F
CF from operation Current ratio 1.9 1.9 2.1 2.1
Net profit 6,677 7,754 8,483 9,282 Quick ratio 0.2 0.3 0.3 0.4
Depreciation/amortization 2,063 1,870 2,412 2,612 Debt to equity 0.6 0.6 0.5 0.5
Change in working capitals -1,488 -2,058 -1,110 -1,242 Net debt to equity 0.6 0.5 0.5 0.4
Others 56 205 325 295 Interest coverage -0.1 -0.1 -0.2 -0.1
CF from operation 7,308 7,771 10,110 10,946 Cash conversion cycle 784.6 809.5 810.5 810.5
Net margin 8.8 9.3 9.3 9.2
CF from Investments ROE 16.9 18.4 18.6 18.8
Net capex -2,455 -2,780 -3,018 -3,314 ROA 10.6 11.6 12.2 12.4
LT investments 0 0 0 0 EPS (IDR) 3,470 4,030 4,409 4,824
CF from investments -2,455 -2,780 -3,018 -3,314 BPS (IDR) 20,522 21,917 23,707 25,665

CF from financing activity

Increase/(decrease) in debt -808 847 -1,393 878
Increase/(decrease) in 0 0 0 0
equity
Dividend payments -5,003 -5,049 -5,040 -5,514
Others -173 -55 68 65
CF from financing activity -5,984 -4,257 -6,365 -4,570
Increase (Decrease) in Cash -1,131 734 727 3,062
Beginning balance 2,726 1,595 2,329 3,056
Ending balance 1,595 2,329 3,056 6,118
Source: Mirae Asset Sekuritas Research

Mirae Asset Sekuritas Indonesia Research 3

 Gudang Garam

APPENDIX 1

Important Disclosures & Disclaimers

Disclosures
As of the publication date, PT. Mirae Asset Sekuritas Indonesia, and/or its affiliates do not have any special interest with the subject company and
do not own 1% or more of the subject company's shares outstanding.

Stock Ratings Industry Ratings

Buy Relative performance of 20% or greater Overweight Fundamentals are favorable or improving
Relative performance of 10% or greater, but with
Trading Buy Neutral Fundamentals are steady without any material changes
volatility
Hold Relative performance of -10% and 10% Underweight Fundamentals are unfavorable or worsening
Sell Relative performance of -10%
* Our investment rating is a guide to the relative return of the stock versus the market over the next 12 months.
* Although it is not part of the official ratings at Mirae Asset Sekuritas Indonesia, we may call a trading opportunity in case there is a technical or
short-term material development.
* The target price was determined by the research analyst through valuation methods discussed in this report, in part based on the analyst’s
estimate of future earnings.
The achievement of the target price may be impeded by risks related to the subject securities and companies, as well as general market and
economic conditions.

Analyst Certification
Opinions expressed in this publication about the subject securities and companies accurately reflect the personal views of the Analysts primarily
responsible for this report. PT. Mirae Asset Sekuritas Indonesia (“Mirae Asset Daewoo”) policy prohibits its Analysts and members of their
households from owning securities of any company in the Analyst’s area of coverage, and the Analysts do not serve as an officer, director or
advisory board member of the subject companies. Except as otherwise specified herein, the Analysts have not received any compensation or any
other benefits from the subject companies in the past 12 months and have not been promised the same in connection with this report. No part of
the compensation of the Analysts was, is, or will be directly or indirectly related to the specific recommendations or views contained in this report
but, like all employees of Mirae Asset Daewoo, the Analysts receive compensation that is determined by overall firm profitability, which includes
revenues from, among other business units, the institutional equities, investment banking, proprietary trading and private client division. At the
time of publication of this report, the Analysts do not know or have reason to know of any actual, material conflict of interest of the Analyst or
Mirae Asset Daewoo except as otherwise stated herein.

Disclaimers
This report is published by Mirae Asset Daewoo, a broker-dealer registered in the Republic of Indonesia and a member of the Indonesia Stock
Exchange. Information and opinions contained herein have been compiled in good faith and from sources believed to be reliable, but such
information has not been independently verified and Mirae Asset Daewoo makes no guarantee, representation or warranty, express or implied, as
to the fairness, accuracy, completeness or correctness of the information and opinions contained herein or of any translation into English from the
Indonesian language. In case of an English translation of a report prepared in the Indonesian language, the original Indonesian language report
may have been made available to investors in advance of this report.
The intended recipients of this report are sophisticated institutional investors who have substantial knowledge of the local business environment,
its common practices, laws and accounting principles and no person whose receipt or use of this report would violate any laws and regulations or
subject Mirae Asset Daewoo and its affiliates to registration or licensing requirements in any jurisdiction shall receive or make any use hereof.
This report is for general information purposes only and it is not and shall not be construed as an offer or a solicitation of an offer to effect
transactions in any securities or other financial instruments. The report does not constitute investment advice to any person and such person shall
not be treated as a client of Mirae Asset Daewoo by virtue of receiving this report. This report does not take into account the particular investment
objectives, financial situations, or needs of individual clients. The report is not to be relied upon in substitution for the exercise of independent
judgment. Information and opinions contained herein are as of the date hereof and are subject to change without notice. The price and value of
the investments referred to in this report and the income from them may depreciate or appreciate, and investors may incur losses on
investments. Past performance is not a guide to future performance. Future returns are not guaranteed, and a loss of original capital may occur.
Mirae Asset Daewoo, its affiliates and their directors, officers, employees and agents do not accept any liability for any loss arising out of the use
hereof.
Mirae Asset Daewoo may have issued other reports that are inconsistent with, and reach different conclusions from, the opinions presented in this
report. The reports may reflect different assumptions, views and analytical methods of the analysts who prepared them. Mirae Asset Daewoo may
make investment decisions that are inconsistent with the opinions and views expressed in this research report. Mirae Asset Daewoo, its affiliates
and their directors, officers, employees and agents may have long or short positions in any of the subject securities at any time and may make a
purchase or sale, or offer to make a purchase or sale, of any such securities or other financial instruments from time to time in the open market or
otherwise, in each case either as principals or agents. Mirae Asset Daewoo and its affiliates may have had, or may be expecti ng to enter into,
business relationships with the subject companies to provide investment banking, market-making or other financial services as are permitted
under applicable laws and regulations.
No part of this document may be copied or reproduced in any manner or form or redistributed or published, in whole or in part, without the prior
written consent of Mirae Asset Daewoo.

Mirae Asset Sekuritas Indonesia Research 4

October 19, 2018

Gudang Garam

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All Other Jurisdictions: Customers in all other countries who wish to effect a transaction in any securities referenced in this report should contact
Mirae Asset Daewoo or its affiliates only if distribution to or use by such customer of this report would not violate applicable laws and regulations
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Mirae Asset Sekuritas Indonesia Research 5