Credit Suisse GUDANG GARAM (GGRM): In line 2Q despite rising Opex – reit Outperform

Better distribution coverage continues to allow a gradual price increases and hence increasing RoE! Ella Nusantoro’s GGRM Target price Rp42,800 is based on DCF and implying 17.4x 2011F PER, assuming a Target 15x 2011F market PER, a 16% premium to market (below historical 1.3x multiple PER ). At Rp35,100- GGRM is trading on 17.1x-14.3 2010F-11F PER, on the back of EPS Growth 14%-20% respectively, and implying 22% upside to DCF Rp42,800. We recommend Buy GGRM, with a longer-term upside as a takeover target (Bentoel takeover 14.6x EV/EBITDA implies Rp49,000).

· Ella Nusantoro (Daily attached & Report available on request): GG reported 2Q10 net profit 8% lower QoQ, as opex soared 62% QoQ with GG became the principal sponsor of the FIFA World Cup 2010 broadcast in Indonesia. The results are within our expectations. Up to 1H10, net profit was Rp1.78 trn (+24% YoY), or 45% of our FY10E on the back of 20% higher revenue growth to Rp18 trn (49% of FY10E). GG continues to gradually increase its selling prices. YTD, it has increased its SKMs (machine-made cigarettes) by 9% and 3% for its SKTs (hand-rolled cigarettes).

· We maintain our OUTPERFORM rating with target price of Rp42,800. The stock trades at an undemanding valuation, at a 45% discount to Unilever Indonesia (UNVR.JK) and at a 13% premium to JCI, much below its 10-year average (32% premium to JCI), with an improved performance (better net margins, higher ROE and higher earnings growth).