TP raised to Rp13,500
Following the excellent performance in the first quarter of the year and buoyed by upbeat market sentiment, Gudang Garam’s shares have rallied 48% in the last one month. This prompts us to use a PE based approach besides DCF to value the stock. Our PE based approach uses a PE of 11.8x. This comes from an 11-year average historical forward PE, and is similar to the current forward market PE of 11.6x. Our new DCF valuation values the stock at Rp12,000/share, reflecting our assumption of improving working capital. Based on the blended valuation, we arrive at a higher target price of Rp13,500, implying 10.7-10.1x PE09-10F. The stock is still relatively attractive compared to its peers. BUY recommendation maintained.
More ambitious plans
The company has more ambitious plans. This year it hopes to launch some new brands besides rejuvenating its existing brands. In addition, it also hopes to invest more in an integrated computer system as well as improve its human resources in order to ensure efficiency and achieve further market penetration. Despite the higher investment costs required, we believe these efforts shall help to strengthen Gudang Garam’s position in the market in the longer term.
Consolidation of distribution
The company is still consolidating its distribution under its fully owned distributor, Surya Madistrindo. This shall provide solid support for its marketing initiatives. These plans are already well advanced and the management is confident that it will make 80% of its sales through its own channels by the end of this year despite its internal target to have the consolidation completed by the end of 2010. If all goes well, sales may surprise on the upside. On the operating side, the consolidation should improve the company’s working capital management due to faster receivables turnover as well as ensure margins enhancement.
Positive trend in the production numbers
The latest GAPPRI cigarette production volume numbers - which are based on the purchase of excise tax ribbons – continue to show a positive trend. On a monthly basis, the industry buying pattern is already back to normal with 20.7 bn sticks recorded in April 2009. Cumulatively, domestic excise tax ribbons purchased rose 7.9% YoY in 4M09, led by Gudang Garam which recorded astounding growth of 21% YoY (across the board). Despite the lack of any direct correlation with Gudang Garam’s actual cigarette sales, this bodes well for the company’s future sales we believe.
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