Earnings upgrade
FY09-10 earnings forecast increased by 27-30%
We have raised our forecasts to reflect the excellent 1Q09 results. We forecast higher sales, higher margins, higher interest expenses, and a lower income tax rate. The net effect is 27-30% higher earnings forecasts for FY09-10. Applying a WACC of 16.5%, we arrive at a higher TP of Rp9,500 compared to Rp7,000 previously. Our new target price translates into a very attractive valuation of 7.5-7.1x PE09-10F and 1.0-0.9x PBV09-10F. Maintain BUY recommendation.
1Q09 Results: outstanding
Gudang Garam has posted an excellent set of 1Q09 results. Net profits jumped 132% to Rp781 bn on the back of a significant margins improvement and efficiency gains. Sales grew 11% to Rp7,651 bn, driven by higher selling prices we believe. The gross profits and operating profits increased by 58% and 94% respectively, beating expectations. Another boost was provided by the lower income tax rate of 28% as a result of new tax regulations, although net interest expenses did rise 11%.
Sales push
A sales push now appears to be in the making. In this regard, Gudang Garam increased its ownership in its now fully owned subsidiary, Surya Madistrindo, a distribution company in 2008. Consequently, Gudang Garam’s sales contribution through this subsidiary continued to increase (it rose to 23% YoY in 1Q09 from 5% in 1Q08). This is good news as it reduces Gudang Garam’s reliance on its existing affiliate distributors. And going forward, it should help Gudang Garam to boost sales further. Given the rosier prospects for the consumer sector as evidenced by high consumer confidence, we raise our sales growth estimate to 7.9% YoY driven by 5% price increases and 3% volume growth assumptions.
Excellent operating performance
The 1Q09 results show excellent operating performance. The gross margin rose to 22% from 15.4% in 1Q08 thanks to lower material costs, lower production overhead costs, and higher selling prices (the company successfully passed on more of its excise tax burden to the consumer). The company also managed to keep its operating expenses at a relatively low level. As a result, the operating margin jumped to 15.6%, its highest level in 6 years. The company’s balance sheet is very strong. Net gearing declined to only 16% from 21% at the end of 2008. Moreover, its net working capital shortened to 223 days, down 11 days y-o-y, largely because of improving inventory turnover.
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