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Friday, September 16, 2011

Gudang Garam Tbk - BUY

by CLSA

Our consumer analyst Merlissa re-iterates our BUY call on Gudang Garam (GGRM IJ), second-largest cigarette company in Indonesia with Rp65,000 TP (from Rp57k), implying 1.2x PEG or 45% discount to regional peers.

In dealing with tripling clove prices, GGRM raised their selling prices by another 1-2% in August 2011, a fifth price increase since the beginning of this year. YTD, they have increased the price by around 7%. Worth noting that GGRM is sitting on massive clove inventory (worth US$585mn as of 1H11). Clove is approx 7% of the COGS. This should mean a stronger margin expansion for GGRM. We raise EPS forecast by 4.1% and 5% for 11 and 12 respectively.

Another interesting observation from the report is that GGRM has proven to be able to grab more market shares in mild cigarette category. They managed to improve market share from 0.1% to 0.8%. GGRM’s highest ad spending growth is in the mild category. At least, this proves that they are serious about growing mild cigarette (their weakness).

I also would like to pint out that employee compensation at GGRM +26% YoY in 1H11 (vs. +3% at HMSP and -13% at RMBA). A good sign that GGRM is investing in people. The day of complacency seems to be over.

Key Points from the report:

· Again, GGRM raised its selling prices by another 1-2% in Aug11, a fifth price increase since the beginning of this year.
· Price increases were done largely to anticipate the current tripling of clove prices (~7% of COGS).
· This means a stronger margin expansion for GGRM, as the largest holder of clove inventory (~Rp5t as of 1H11).
· GGRM managed to gradually improve its market share (from 0.1% to 0.8% for its new Pro Mild product)
· WTO has finally decided to reject Indo argument on unnecessary clove cigs ban to US. However, impact for GGRM is unlikely to be significant.
· US exports for GGRM has historically been a mere 1% of its overall sales.
· Despite its double-digit earnings growth and 20% ROIC, the stock is still trading at 1x PEG or 50% discount to its regional peers

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