1H19 Double Digit Growth
GGRM posted for 1H19 sound performance, given a 16.4% y-y growth to IDR52,7 trillion in revenues; a 20,2% y-y gains to IDR5.7 trillion in operational profits, and double-digit growth or 20.4% y-y increase to IDR4.2 trillion in net profits. In 1H19, double-digit growth in top and bottom line was driven by a 14.7% y-y sales growth to 46.6 billion cigarettes. Full Flavor machine-made clove cigarettes (Sigaret Kretek Mesin Full Flavor, SKM FF) dominating domestic market share strived for sales of 38.3 billion cigarettes or a 15.5% y-y. Then, hand-rolled cigarettes (Sigaret Kretek Tangan, SKT) and machine-made cigarettes with low nicotine and tar contents (Sigaret Kretek Mesin Low Tar and Nicotine, SKM LTN) respectively posting sales of 4.2 billion cigarettes.

Pressuring Regulations
After unchanged cigarettes excise taxes during FY19, the Ministry of Finance rolled out the hike of 23% in cigarette taxes and the increase of 35% y-y in retail selling prices (Harga Jual Eceran, HJE) to take into effect on January 1st, 2020. We consider that the hike will narrow revenue margins and operational profits due to decreases in sales volume. The sales volume of SKM in FY19 is estimated to hit ~11% y-y or 85 billion cigarettes, but its FY20 growth is likely to decline to ~9% y-y or 78 billion cigarettes, coupled with the hike in average selling prices. Based on Nielsen research, in 1H19, the cigarette industry weakened by 8.6% y-y lower than that in 1H18; thus, we revise our target price to IDR75,075 or a 29.74%, with the estimated COGS growth of ~8% y-y.


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