Gudang Garam (GGRM)

A still challenging outlook limits re-rating potential; downgrade rating to Hold

• GGRM’s 6-8% price adjustment YTD may support FY24F margins, but we expect volume may continue to be under pressure.
• We trim our FY24-25F NP by 42-47% due to lower volume assumptions (-8/-13% yoy from -5/0% prev.) and yoy margin pressure.
• We downgrade our rating to Hold with a lower TP of Rp17,500 as we see less rosy NP outlook.

Two price adjustments YTD, but volume remains weak

GGRM has adjusted its ex-factory prices twice in Mar and May24, resulting in total YTD ASP increases of +6% for GG Merah 12s (SKT), +6% for GG Intl 12s, and +8% for Surya 16s. While these price adjustments may only partly support GGRM’s margin, we now expect weaker FY24F volumes as our expectation of an election-driven volume boost in 1Q24 failed to materialize. In FY23, GGRM’s sales volume fell -25.6% yoy, with a lower market share of 21.2% (FY22: 25.5%). SKT reported a 2% yoy lower volume, while SKM’s volume tanked 28% yoy.

FY24-25F estimates cut on lower volume growth and margin assumptions

As FY24 excise regulation continues to have a bigger cost impact on tier-1 producers (incl. GGRM), we believe the company’s focus will be on preserving margins. We expect our higher price hike adjustment to result in FY24-25F gross margins of 11.6-11.7% (down from 12.3% in FY23). Furthermore, we expect this will come at the expense of volume. Hence, we have lowered our FY24-25F volume growth assumptions to -13% and -8% yoy (down from -5% and 0% yoy prev.). Overall, we trimmed our FY24-25F net profit estimates by 42% and 47% to Rp4tn (-25% yoy) and Rp4.1tn (+1.7% yoy), respectively.

Downgrade rating to Hold with lower TP of Rp17,500 on challenging outlook

While GGRM currently trades at an undemanding 0.5x FY25F P/BV and 8.2x P/E (-1SD avg 3y P/E), we see the outlook remaining challenging amid weak volume growth outlook, which may delay further price adjustments and drive further product mix shift toward value products. GGRM recently announced it will not pay dividends from FY23 net profit, as it aims to preserve earnings for working capital. We downgrade our rating to Hold with a lower TP of Rp17,500, based on -1SD avg 3y PE of 8.3x. Upside risks include favorable regulations for Tier-1 cigarette companies (i.e the 2025 excise and a new excise structure that narrows the gap between Tier-1 and lower-tier producers).

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