Gudang Garam - Paying out highest dividend in history - Deutsche Bank

Strong FCF gives clear pathway to higher dividend payout
GGRM has declared a dividend of Rp880/share, the highest in its history and a sign of management's intention to increase shareholder return. This represents a 41% payout ratio, the highest since 2006's 48%, and supports our thesis that GGRM is embarking on a pathway of a higher dividend payout due to its high earnings quality and strong free cash flow generation, which in our view will lead to a re-rating of the stock. We believe there is room to increase the dividend payout ratio from the current 41% to 100% due to its strong free cash flow generation. The dividend ex-date will be on July 26 and payment date on August 8.

Pricing power being underappreciated
GGRM has underperformed the JCI by 23% since September, even as it has proven its pricing power repeatedly, raising prices 19 times in the past 24 months by a total of 24%. In our view, this demonstration of pricing power warrants a further re-rating of the stock.

Trading at 25% discount to regional peers
GGRM is trading at 14.2x PE FY12F, which we view as undemanding due to its pricing power and higher dividend potential. Our DCF-based target price of Rp62,000 (34% upside potential) implies 19.1x PE FY12F, which would put it in-line with regional peer. Risks: excise policy and regulation.