NOMURA Global Market Research
Indonesia strategy: Outlook 2016 – Time for the big push
Release Date: December 10 2015
More room for further re-rating
Excise overhang is over for the next few months
With the finalisation of the cigarette excise tax for FY16, the overhang now appears to be over for the next few months (until there is discussion on RAPBN 2017). The government’s decision to raise the cigarette excise tax by ~15% (weighted average), as opposed to market concerns of >20%, indicates that the government is aware of the negative impact of an excessive excise hike on cigarette companies. We think that the ~15% excise hike should be manageable for GGRM, and anticipate the company will pass on most of the cost increases to consumers by raising ASPs by ~11%.
HMSP’s inclusion in indices, has and will continue to benefit GGRM
GGRM has benefited from HMSP’s inclusion in the MSCI and JCI, with its share price having risen by ~20% over the past five weeks; we think the momentum can continue as the valuation gap between GGRM and HMSP (HMSP IJ, Neutral) narrows.
Reversal in FCF could serve as a further re-rating catalyst
GGRM’s 9M15 capex was 34% lower than in 9M14. We expect capex to continue to moderate over the next few years, as most of its capex plans were completed in FY12-14. As a result, we expect FCF to turn positive from this year (excluding the one-off in excise payment before the year-end). With positive FCF generation, there is a possibility of GGRM paying a higher dividend or lowering its short-term debt, thus driving the share price higher.
Maintain Buy as valuation remains attractive
Despite the recent surge, GGRM still trades at 16.7x FY16F EPS of IDR3,075, 15% cheaper than the average for the consumer staple names we cover (ex HMSP and UNVR [UNVR IJ, Neutral]). We still see significant potential upside to the share price. Therefore, we reaffirm Buy and our TP of IDR65,000, which is based on 21.1x FY16 EPS (~40% discount to HMSP).