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Apr 04, 2016 14:44:22
Gudang Garam - An unfiltered experience
 
Our BUY thesis on Gudang Garam ($GGRM) has been based on two assumptions: strong earnings and a slowing capex cycle. The strong 4Q15 results last week only reinforces analyst Robert Pranata’s BUY conviction on the stock.  This morning he upgrades earnings by 2%-3%, already ahead previously, this brings our GGRM numbers to 15% ahead of FY16 consensus.
 
Key issues:
 
Margin expansion. GGRM posted Rp6.4trn of net profit in 2015, 107% of 15CL and 115% of consensus. While sales came inline with our expectations, gross and Ebit margin came 2% above ours and 10% above consensus estimates. GGRM’s strong margin in 4Q15 was driven by its aggressive price increase in 4Q15 and strong performance of its higher margin products (machine-made full flavours and hand-rolled)
 
Capex cycle has peaked.  Capex as % to sales also dropped from 4.1% in 3Q15 to 3% in 4Q15. This is in-line with our forecast and we estimate that GGRM’s capex will decline to Rp1.8tn (US$136mn) in 16CL and Rp1.5tn (US$114mn).
 
What about taxes?  Robert assumes higher excise tax rate for 17CL as we believe the government is more likely to have a higher increase for excise next year, rather than increase this year’s excise tax further.
 
Taking all of this into account, Robert upgrades GGRM’s earnings 2%/3% for 16/17CL and increase our target price from Rp78,000 to Rp80,000.  GGRM remains one of our key BUYs.
Bull
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