Gudang Garam Alert : Flexing its pricing power with fourth hike of the year - Deutsche

Fourth major price increase of the year
Gudang Garam is raising prices for all of its major brands by c. 0.7%, which we view as a sign of its strong pricing power, which it has repeatedly demonstrated over the past 3 years. This is GGRM's fourth major price hike of the year with the company having raised prices by 2.8% YtD or 8% YoY. The company just needs to raise prices by an additional 1.5% to meet our full year price hike assumption of 8% YoY.

Consensus numbers at odds with GGRM's price increase strategy
Our net profit is 10% ahead of consensus numbers, which is implying that GGRM does not increase prices anymore this year. We firmly believe that given its track record of 4 price increase this year and 10 price increases last year that GGRM is still focused on maximizing its price increases so long as there is no volume impact.

Reiterate Buy as trading at 28% discount to regional
GGRM is trading at 14.4x FY11F PER, which is at a 37% discount to India's ITC and a 20% discount to BAT Malaysia, whose net profit declined in 2010 and is expected to grow by only 2% this year. We view GGRM as attractive given its pricing power, strong brands and favorable excise policy. We view management's intention to distribute its first ever interim dividend (which was later postponed until later this year under a stock exchange regulation technicality) as a strong signal that GGRM is focused on increasing returns to its shareholders. Risks: drastic changes in excise policy.