CLSA Consumer, GGRM recovery in sight

Not many look at Indonesia consumer sector seriously anymore. The sector was the darling of the market in the 90’s with more than 20% weighting the index. The weighting has now dropped to less than 10%. This is despite consumer spending accounts for 60% of Indo GDP, driven by 235mn consumers, with average per capita income of US$2,100/year.

Indonesian retailers have been enormous competition, not just from multinationals but also from those who lost the jobs and set up neighborhood shops. Unilever (UNVR IJ) and Sampoerna (HMSP IJ) have been doing very well but more of an exception than norm. Other companies with superior performance, such as the consumer company Wings Group, are still privately held.

So it is refreshing that Nick Cashmore has spent some time writing about the consumer sector. The immediate outlook for consumer demand still looks challenging. Companies still have to struggle with rising unemployment, weak purchasing power, and a general slowdown in growth.

But the chart below suggests that there are pockets of strengths. Four companies registered positive QoQ revenue growth in 1Q09: UNVR, INDF (we only look at the consumer business), and 2 cigarette companies: HMSP and GGRM (yes, yes we are talking about the beaten down and overlooked Gudang Garam, the cigarette company)

In his GGRM report today, Nick highlighted the dramatic earnings recovery at GGRM. If this is sustainable, the stock offers incredible value for investors. Assuming 1Q09 performance is sustainable, GGRM is trading at 5.2x 09 PE. Our ex consumer analyst Wilianto commented that he never heard GGRM trades at such a low multiple.

Key points from the report:
Once an investor favourite, GGRM has struggled for much of the past decade, losing market share and profitability to competition.
Regulatory changes favor large producers, leveling the playing field. Plus, the govt is also clamping down illegal cigarette producers (we estimate illegal + small producers account for about 35% of the national cigarette market share).
Great turnaround story. Early days, but there is a dramatic margin recovery at GGRM.
Revenue, gross, operating, and net profit grew 10%, 58%, 94% and 132% YoY respectively for 1Q09.
Valuation: assuming 1Q09 margins are sustainable, the stock trades on 5.2x current year PE, with a 20% ROE and 1x PB.
Upside: provided these returns are sustainable, we believe 10x PE would be closer to fair value.