HM Sampoerna (HMSP IJ)

Regulatory uncertainty loom over HMSP

 

  • HMSP adjusted ASP of its products by 8.4% ytd in Jul24 (vs 1Q24: 6.1% ytd), which continues to weigh on its vol. growth (1Q24: +1.6% yoy).
  • We trim our FY24/25F core profit forecasts by 2.8%/0.5% to reflect lower gross margin estimates.
  • We downgrade our rating to Hold with a lower TP of Rp730 on lingering industry headwinds, despite HMSP’s promising growth from HTU.

Rising cigarette prices continue to weigh on vol. growth

Based on our price survey, HMSP’s cigarette products saw an ASP adjustment of 8.4% ytd in Jul24 (vs 1Q24: 6.1% ytd), which we believe is intended to pass on the higher excise cost. In FY19-24, the excise tax tariff has increased by CAGR of 16% for SKM and 6% for SKT (versus a national minimum wage increase of 4.9% in the same period). Meanwhile, we have observed that the rise in cigarette prices over the past 5 years, coupled with weak purchasing power, continues to lead to a gradual increase in illegal cigarette sales (data from PMI indicates that illegal cigarettes now account for around 15% of the total world cigarette market). With the incoming government likely to target higher fiscal spending, at this juncture, we do not expect a change in FY25 excise regulations to favor cigarette companies, especially the tier-1 manufacturers. 

Cut FY24-25F core profit est. by 2.5/0.5% on lower margin estimates

HMSP reported 1Q24 sales volume of 20bn sticks (+1.6% yoy), translating to a market share of 27.5% (FY23: 28.6% and 1Q23: 28.5%), with Heated Tobacco Unit (HTU) sales volume of 200mn units (+100% yoy). We maintain our FY24F sales volume growth but lower the FY25F volume growth projection to 1.2% yoy (1.5% yoy prev.). With reduced FY24-25F ASP growth estimates of 10.8/8.3% yoy ASP growth (vs. 11.8/8.2% prev.), we expect FY24/25F revenue growth of +11/+9.6% yoy. Amid continued pressure on purchasing power, we anticipate an increasing contribution of value products, leading to a 20bps decline in FY24F/25F GPM to 16.5% (FY23: 16.7%). Overall, we trim FY24/25F core profit forecast by 2.5/0.5% to Rp8.2tr (+1.5% yoy growth) and Rp8.9tr (+8.4% yoy), respectively.

Downgrade rating to Hold with lower TP of Rp730

We see lingering challenges for the tier-1 producers due to persisting downtrading driven by weak purchasing power and unfavorable regulations. On a positive note, the robust growth in 1Q24 HTU volume offers hope for a new LT growth driver, but we think it is currently still too small at 1% of total volume. Thus, we downgraded our rating to Hold and lowered our TP to Rp730 (from Rp1,100 prev.), based on -2SD avg 3-y FY25F P/E of 9.6x. Upside risks include potential new govt regulations to narrow the gap between tier-1 and below-tier-1 excise tax tariffs and a sub-inflation increase in the FY25 excise tax tariff.

 

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