Gudang Garam posted FY09 net profit of Rp3.5tn (+83.8%yoy, -5.9%qoq), in line with our estimates, yet 13% above consensus. This was largely due to improving margin thanks to the integration of its distribution arm, which also resulted in efficiency improvement in term of lower receivable and debt level by Rp1.1tn. The story is far from its end. The company still has growth potential in distribution arm modernization and integration. As an aggressive marketer with significant selling expenses ! in 4Q09 ( +149%qoq) and its plan to be the World Cup sponsor in Indonesian TV channel, double-digit earnings growth will spill through 2010-11. Maintain Buy.
FY09 results were in line with our estimates, but surpassed consensus. Gudang Garam posted FY09 revenue of Rp33.0tn (+9.0%yoy, +11.5%qoq). This, combined with margin improvement, translated into a net profit of Rp3.5tn (+83.8%yoy, -5.9%qoq) which was in line with our estimate, yet 13% above consensus. Profit margin grew from 6.2% in FY08 to 10.5% in FY09 due to additional margin from distributio! n activit ies as a result of distribution arm integration.
Operational efficiency. Distribution arm integration resulted in a series of operational efficiencies. Accounts receivable fell by Rp1.1tn (-50.5% yoy) so that debt could be reduced also by Rp1.1tn (-26.5%yoy). This resulted in FY09 net gearing of 10.7% vs20.6% in FY08. We estimate that the company will be in net cash position by 2012. A 24.6%yoy inventory increase of Rp3.3tn is tolerable as it is intended to expand national sales outlet coverage, and to accumulate excise tape at cheaper price before excise rate hike in 2010.
Sustainable double-digit growth. FY10 sales should entirely come from internal distributors, vs 86% in FY09 as GGRM completed distribution arm integration in the middle of 2009. Therefore, we estimate gross margin to increase from 21.7% in FY09 to 23.1% in FY10F. GGRM has only 60% ownership in distributors outside Java, meaning another room for further integration in the long term. In addition to margin growth potential, we also see that the company aggressively increased! marketin g efforts with 149%qoq selling expense increase in 4Q09, and its plan to be World Cup sponsor. We believe the company will reap the benefits of the aggressive marketing in mid to long term. Internal restructuring and modernization in distribution arms will also improve product availability, customer services, and marketing capabilities to support sales growth.
Maintain Buy. Aggressive marketing and operational improvement will benefit GGRM in the mid term and re-position it in comparable valuation with regional players. Therefore, we use PE-based valuation which results in TP of Rp30,000/share. We maintain our Buy stance on GGRM which currently is trading at PER10-11F of 13.0-11.4x, lower than peers of between 15.5-13.7x, respectively.
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