GGRM Jan2023

GGRM

Contact our analyst Eka

BUY, 27% upside
6th January 2023
Price Rp 16,600
Target price Rp 21,200

Stable sales

GGRM sales increased +2.4% YoY or -0.4% QoQ to IDR 32.25 trillion bellow the total domestic cigarette sales growth of +11.6% in 3Q2022. For 9M2022, GGRM booked +2% sales growth to IDR 93.9 trillion.
GGRM’s export sales decreased -30% YoY or -13% QoQ to IDR 385 billion in 3Q2022, while GGRM’s domestic sales increased +3% YoY but were slightly lower -0.2% QoQ to IDR 31.8 trillion in 3Q2022.
Despite a higher ASP in 3Q2022, all of GGRM’s types of cigarettes maintained positive growth. Machine-made clove cigarettes sales maintained positive growth of +1.7% YoY to IDR 29.5 trillion, hand-rolled clove cigarettes sales increased at a faster rate of +13% YoY to IDR 2.38 trillion in 3Q2022.
We expect GGRM will maintain positive sales growth of 4.7% YoY to IDR 137 trillion in 2023F because of higher prices and stable sales volumes.

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Excise tax hike

The government has increased tobacco excise tax again for 2023.
As the details, the excise tax for SKM groups I and II will increase 11.5% and 11.75% respectively. While SPM excise will increase by 11% and 12%, For SKT tax also rises by 5%. The government also increased the excise tax for electric cigarettes by 15% every year until 2027.
Amid differences in cigarette excise tax increases, there is a widening gap between cigarette prices for tier 1 (SKM 1) and non-tier 1 producers, resulting in a shift in cigarette consumption to the cheaper brands.
As of 9M2022, most of GGRM revenue came from more expensive machine-made clove cigarettes (SKM) at 92%. The excise tax hike, will therefore likely have an impact on sales volume if GGRM passes on the tax by raising selling prices.

3Q2022 Results: More pressure from higher excise tax

After a loss in 2Q2022, GGRM booked a profit in 3Q2022 of IDR 543 billion but still -70% YoY. For 9M2022, GGRM still booked a net profit of IDR 1.49 trillion, but that’s a drop of -64% YoY. This meant higher margins in 3Q2022, with the NPM at 5.8%.
Operating expenses were lower QoQ from a gain in forex, resulting in an operating profit of IDR 753 billion with a higher OPM of 2.3% in 3Q2022.
GGRM’s cost of sales was slightly lower quarterly but still higher YoY, resulting in a higher gross profit of +37% QoQ or -34% YoY to IDR 2.55 trillion.
With more pressure on the bottom line profit from more excise hikes, we revise down our GGRM 2023F bottom line profit target to IDR 2.1 trillion.

Valuation: BUY, TP 21,200

GGRM’s share price continues to drop pressured by the excise tax hike. However the margin improvement in 3Q2022, shows that GGRM can still grow. We are targeting GGRM to trade at a 19X PE within a year. Target Price is IDR 21,200 which represents 27% upside. We upgrade our recommendation to BUY.

Previously

GGRM Aug2022