Wismilak Inti Makmur

Wismilak Inti Makmur
Attempting a high jump

§        Excise tax hurdle: Indonesia’s tobacco industry is in the process of converging its excise tax across every type of cigarettes (exhibit 7). The implication of this event is that smaller producers’ excise tax is increasing at a faster rate than larger producers’ excise tax. Wismilak Inti Makmur (WIIM), with 1% market share in 2011, is one of those small producers which are attempting to jump the tier “hurdle” in order to minimize the excise duty hike effect.

The company started its operation in 1963 through its current subsidiary, Gelora Djaja, which handles the production side of the business. In 1983, WIIM incorporated Gawih Jaya to distribute a part of the business before restructuring both Gelora and Gawih under Wismilak Inti Makmur (WIIM) in 1994 (exhibit 6). Run by 3 families: Walla, Widjajadi and Winarko, WIIM derives most of its revenue from machine rolled cigarettes (SKM), which accounted for 80% of 2011 total revenue.

§        10% higher than expected 2012 net profit due to Mild Diplomat: In 2012, WIIM has indicated net profit of IDR74-75b, some 10% higher than its estimate at the IPO of IDR67b.

This is helped by higher than expected price increase and volume growth of Mild Diplomat, newly launched in mid-2012, mainly in Central and East Java.

 In 2013, WIIM, betting on the continued success of Mild Diplomat, plans to jump over the 2b total production mark, partly also supported by distribution network expansion.

The company targets 2013 total production of 2.5b sticks, up from around 2b sticks in 2012, translating to top line level of IDR1.5-1.6t (2012: more than IDR1.1t) helped by blended ASP increase of about 8%.

On 2013 bottom line, WIIM expects to book IDR120b, up more than 60% y-y, propelled by operating leverage from G&A cost and lower net interest expense from its IDR409b (USD43m) IPO proceeds.

§        Further growth from added distribution network & capacity: WIIM currently operates 17 branches, 5 stock points and 29 agents to cover the whole nation. North Sumatra, East Java and Central Java are WIIM’s major markets, although there are plans to further expand its distribution network outside these areas.

On capacity, the company separates the lines into SKM (machine rolled) and SKT (hand rolled) with each divided again into regular and mild products (exhibit 9-10). WIIM operates production capacity of 2.5b sticks in 2011 with 434m sticks for SKT and 2b sticks for SKM. In 2012, the company added its SKM capacity to 2.5b sticks, before adding 1.2b capacity in 2013 (equipment to arrive in mid-2013).

Outlook & valuation:
A growth driven counter – cheap on PEG: Given WIIM’s better than expected 2012 results, we see potential share price upside, particularly if the company can continue to surpass its targets in 2013.

On valuation, WIIM is on 2013 PE of 12.6x (20% discount to the market), reflecting cheap PEG of 0.2x. Thus, we expect WIIM’s out-performance since IPO (exhibit 5) to persist, backed by subdued inflation this year coupled with increased smokers’ purchasing power stemming from higher wages.

Bottom line growth, however, is subject to the strength of WIIM’s brand equity when raising its products prices in tandem with its higher-up excise tax tier.

WIIM’s other challenges will be the government’s tighter limitation on cigarette marketing as well as competition from its peers.

me @ LOTS Trading Club (LTC)