CIMB Company Update – Gudang Garam – Coming together

Maintain Outperform and target price of Rp41,600 for GGRM, based on 15x CY11 earnings, in line with our index target. We maintain our earnings forecasts following a recent visit to the company. The company continued to raise its selling prices gradually in June and July, particularly for SKM cigarettes. The price increases have exceeded the excise tax growth at the beginning of the year, strengthening our expectation for margin expansion. Much lower excise tax growth in 2011compared with previous years should also bode well for Gudang Garam. We expect stock catalysts from stronger gross margins on the back of timely price increases, low growth in the excise tax, and lower costs of interest.