News & Research


Sector Update : 2019 Outlook - Battle for Growth
Thursday, January 10, 2019       19:18 WIB

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2019 Outlook - Battle for Growth
  1. Stronger cigarette sales outlook given no excise duties hike in 2019.
  2. We expect only 3%-5% price rises this year (vs 8%-12% in prior years).
  3. Millennial generation smokers coming back to conventional cigarettes.
  4. We upgrade earnings and reiterate BUY for both and .

More bullish tobacco industry outlook for 2019 - We forecast flattish cigarette sales in Indonesia in 2019, after three consecutive years of negative growth in 2016-2018, given our expectation for lower cigarettes price rises this year on the back of the government's decision to stop hiking excise duties in 2019, higher social fiscal spending, and economic stimulus arising from parliamentary and presidential elections. We are bullish on the sector and maintain our BUY rating for both Gudang Garam () and HM Sampoerna () although the former remains our preferred pick due to its lower valuation and greater expose to machine-rolled (SKM) cigarettes, whose growth outpaced hand-rolled (SKT) cigarettes.
We expect only 3%-5% price rises this year (vs 8%-12% in prior years) - We expect tobacco producers to still raise prices in 2019, despite unchanged excise duties, albeit more modestly at only 3%-5% Vs price increase of 8%-12% in prior years. Such price increases will be the key earnings growth driver for and , given our conservative assumption of stable cigarette unit sales this year, and little cost pressures from excise duties and raw materials. We note consumers preference is also shifting towards Medium (Bold) cigarettes, which are priced lower than full-flavor cigarettes at between Rp12,000-Rp15,000 a pack but have stronger taste than low-tar-low-nicotine (mild) cigarettes. We believe this medium segment will increase competition between major cigarette producers.
Millennial generation smokers coming back to conventional cigarettes- Our on-the-ground findings also noted the trend of millennial generation smokers, which represented 34% of Indonesia's population, coming back to smoking conventional full-flavor machine-rolled cigarettes from prior trend towards e-cigarettes. We expect this trend reversal to be reinforced by recent tax regulation (PMK No.156/PMK.010/2018) that impose an excise duties of 57% (from no tax), higher than conventional SKM cigarettes (53%). In addition, the governments intensifying effort to eradicate illegal cigarettes, which pay little to no excise duties, should also improve sales of major cigarette manufacturers.
Valuation and stock picks - We upgrade our FY19F-FY20F earnings forecasts for the major tobacco producers by 1% - 6% on the back of unchanged excise duties this year (vs our previous assumption for excise duties hike of 11%) and we now forecast earnings growth of 12% and 16% in FY19F for and , respectively, on the back of ASP growth of 5% and 3% respectively. We view tobacco sector valuation is still attractive in light of historical trading range and reiterate our BUY for and .


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