Pandu Anugrah
Head of Research

Willy Suwanto
Equity Analyst, Ext 178

BCA Sekuritas

Facts: Further improvement

· Data published by Philip Morris International suggests that 9M18 domestic cigarette shipments of 224.8bn sticks exhibit slight improvement (-0.5% YoY), partly driven by continued purchasing power recovery momentum in 3Q18 (+1.4% YoY/+8.7% YoY) on top of seasonality factor.

· HMSP’s overall volume in 3Q18 reached 26.5bn sticks (+1.2% YoY/+6.1% YoY), accelerating from 2Q18 volume growth of 0.7% YoY.

· HMSP managed to maintain its 33% market share in 3Q18, owing to the continued strong performance of Magnum Mild Variant 16s variant, bringing Dji Sam Soe total volume to 7.6bn sticks (+17.9% YoY), accounting for 29.2% of total volume shipment. Sampoerna A Mild continued to struggle, with 3Q18 volume slipping 1.5% QoQ/1.4% YoY to 10.3bn sticks. 9M19 shipment of 74.5bn (+0.1% YoY) accounted for 73% of our full-year projection (+0.9% YoY)

Outlook: Solid 3Q18 earnings; Limited growth in 2019F

While our previous thesis posted that momentum may not last, we saw recovery momentum in 3Q18 volume; this positive phenomenon might be less evident in 4Q18. We project 3Q18 net profit to reach IDR3.4tn (+2.5% YoY), in line with stronger volume and typically higher margin from full-impact from higher ASP (Forecast: +9.2% in 2018). A glimpse of our expectation in 2019F: 8% higher minimum wage and allocation of social village budget should add buffer against any pressure from the inflation resulting from weakening IDR and higher petrol price ahead (should oil price remain high). On the upcoming excise tax regulation (to be issued by government by end of October), we expect milder increase of around 8.7% for 2019F vs. 10.4% in 2018. Note that the government expects cigarette excise tax revenue to grow 6.4% vs. 2018 estimate of 1.4%. This could mean that the additional growth would likely come from volume, instead of from a rate component. That being said, we expect volume growth of around 1.5%, a tad stronger than 2018 forecast.

Recommendation: Maintain HOLD with TP of IDR4,000

We maintain our HOLD rating with unchanged TP of IDR4,000, pegging the stock 37x PER, above its historical mean of 33.7x. Share price has underperformed JCI by 10.8% YTD and will likely to be the case ahead. Since early 2017, net foreign outflow on the counter has reached IDR4.24tn while share price has actually stable (+0.26%). This may suggest higher exposure of domestic investors and support our thesis for shelter in a large cap names under current volatile times. Risk ahead may stem from 1) stronger recovery momentum and 2) another 2019 excise tax surprise.

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