CLSA Research Today: Gudang Garam (GGRM IJ), More Smoke

Swati wrote a report on turnaround story Gudang Garam (GGRM IJ), reiterating her BUY call. Her TP is Rp22,350 based on 15x 2010 earnings. The stock currently trades at 9.4x 2010 PER. GGRM used to trade at 16x one year forward earnings on average from 1992-1996. There is upside risk to our earnings next year as we forecast only 8.7% yoy growth for 2010.

Indo cigarette industry: very attractive
About 1/3 of 230mn Indonesians smoke and 78% smokers start smoking before age of 19. The cigarette industry supports no less than 6mn people in Indonesia and this is something that the government is obviously aware of.

Turnaround story continues, more than just distribution
GGRM continues to be an interesting turnaround story. While we do not expect a quick turnaround, we think GGRM is moving to the right direction. And years of declining operating performance means has set a very low benchmark to start with.

Currently, not only is the distribution network being revamped, GGRM is hiring brand managers, marketing planners, trainers for the first time. Advertising and promotion activity has increased significantly. New products are being launched.

Expect good 3Q09 numbers
We expect good 3Q09 as volumes and price increase. In her note, Swati explains why sales have been flat yoy for 1H09: (i) inventory adjustments due to first time consolidation of the distributor (ii) a change in product mix in favour of hand made cigarettes.