Gudang Garam's commitment to change brings hopes that the giant producer could be making a comeback. With a new distribution system in place, gross margins are expected to fare better as the company increases its control over distributors and negotiates for higher margins. In addition, Indonesia's new excise tax system for cigarettes favours the bigger players, potentially squeezing out competition. We initiate coverage of Gudang Garam with an Outperform rating and DCF-based target price of Rp7,150 (13.8% WACC, 5% LTG). This implies 7.3x and 6.5x CY09-10 core earnings respectively.
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