Gudang Garam – Refocusing on profitability – BUY Tp57,000 - CLSA

Another good piece from Merlissa. She is still a buyer of Gudang Garam (GGRM IJ) as we believe in their ability to deliver double-digit earnings growth despite competitive industry. We upgrade our TP to Rp57,000/sh, implying 19x P/E 2012CL.

Couple of things to highlight:

Refocusing on profitability. Just recently, GGRM raised its ASP by another 1%, which reaffirms our confidence on its continued pricing power. This translates to a 7% ASP increase on yearly basis, mirroring the excise tax hike. We thus believe that GGRM will be able to pass on the excise tax hike, like what they did in the last 3 years.
Gaining market share in mild category. Its new Surya Pro Mild is well accepted by the market – of which they manage to gain ~0.8% market share in less than one year.
Ramping up marketing efforts. Our channel check said that the company is hijacking marketing people from HM Sampoerna (HMSP). Also, their 1Q11 ad spend grew by 50% YoY or about 3.2% of overall sales. This is necessary to create stronger brand equity in the longer term, we believe.
We agree that valuation is not glaringly cheap, yet remains attractive if we compare to its regional peers. Based on PEG valuation, Gudang Garam (GGRM) and Indofood (INDF) are still trading below 1x. Also, Mayora (MYOR) and Mitra Adiperkasa (MAPI) in small-cap category are trading at attractively 0.5x PEG 2012CL.