Based on the The Association of Clove-Blended Cigarette Manufacturers (Gappri) data (excise duty stamp purchase), which is a good indication of actual volumes, Gudang Garam volumes grew by 10.95% yoy (Jan to Aug 09). Gudang Garam market share based on Gappri is 23.5% vs HM Sampoerna (consolidated) is 26%.
The growth seems to be faster in the handmade kretek segment at 20.12% yoy for Gudang Garam vs 10.5% for Djarum and -12.37% for HM Sampoerna. The company confirms that the growth has been strong in handmade kreteks suggesting that as smokers are switching from machine made to handmade, they are increasingly switching to Gudang Garam’s handmade kreteks. Machine made kreteks shows a yoy growth of 12.3%.
So even if the volumes are growing, the impact on revenue is marginalized as there is a change in product mix in favour of handmade kreteks which are higher margin lower price products. But we should see some revenue growth as the company has completed consolidation of the distribution. Handmade kreteks now account for 22-24% of sales vs 14% last year.
We maintain conviction buy on the stock as it is still trading at 10x 2010 P/E and 1.4x P/b. It remains one of the best turnaround stories. It is the only listed liquid cigarette company in Indonesia where 1/3 people smoke regularly, 78% smokers start smoking before 19 years age. While cigarette industry is declining in other countries, in Indonesia, we just had BAT acquire nearly 100% stake of Bentoel a small company with 5% market share. We expect good 3Q09 results as volumes looks robust and they managed to increase prices recently.
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