Danareksa Gudang Garam TP; idr7,000

Shift to the right

Changing focus
On a positive note, the management appears to recognise the importance of adapting to meet changes in consumer tastes. In this respect, they are focusing more on boosting the sales of hand rolled and mild cigarettes, while, at the same time, still maintaining the brand equity of its machine rolled cigarettes. Although the company still has some way to go, we believe that Gudang Garam is nonetheless on the right path to sustain or even increase its market share in the long run.

Improving its distribution
Starting last year, Gudang Garam has taken measures to improve its distribution system by consolidating it under its fully owned subsidiary, Surya Madistrindo. This was done by acquiring its main distribution arms consisting of three affiliated companies that exclusively distribute Gudang Garam cigarettes. As such, Gudang Garam hopes to attain higher sales by having better market reach as well as providing a better service to its distributors, particularly the smaller retailers. By having greater control over distribution, the company should be better placed to adapt toward changing market dynamics.

Reiterate BUY, TP of Rp 7,000

The new excise tax regulation has started to be applied early this month. We therefore adjust our numbers accordingly and apply new assumptions on specific excise tax increases of around 5%-10% per annum. At the same time, we have also toned down our raw materials cost assumption as the outlook for commodity prices looks stable. As a result, our earnings forecast is adjusted slightly higher by 2.5-2.8% in 09-10F. Our share target price remains at Rp7,000, implying an attractive valuation of 7.1-6.9x PE09-10F. BUY.