CIMB Tobacco - Pharmaceutical Sector Note - Capping tax deductible for A-P spending

Purportedly to boost tax revenue, the Ministry of Finance has issued a ministerial decree capping the amount of tax deductible allowed for expenses arises from advertising and promotions by tobacco and pharmaceutical companies. In our estimates, the earnings of Kalbe and Gudang Garam, should they maintain their A&P spending, could decline by 45% and 15.7% respectively in FY09, all else the same. Given a lack of clarity in implementation and our view that the regulation could be reviewed, diluted or even postponed, we have not made any changes to our estimates for Kalbe and Gudang Garam. Both remain Outperform with DCF-based target prices of Rp1,170 and Rp17,100 respectively.