HM Sampoerna: Resilience Amidst Challenges in Indonesia’s Tobacco Industry

Date: October 30, 2024
Broker: PT Maybank Sekuritas Indonesia

Recommendation: Maintain BUY
12-Month Price Target (TP): IDR 850 (revised down from IDR 1,050), which implies a potential 30% upside from the current share price of IDR 700.
Key Driver for TP Revision: HMSP faces ongoing challenges such as weak purchasing power among consumers and heightened competition from smaller cigarette producers.

Projected Earnings Growth: Maybank projects a FY23-26 earnings compound annual growth rate (CAGR) of 6%, marking a recovery from the prior period’s FY19-22 contraction of -22%.
9M24 Earnings Results: HMSP’s 9-month earnings for 2024 are reported at IDR 5.2 trillion, reflecting a 16% year-over-year decrease, primarily due to sluggish consumer purchasing power.
Q3 2024 Revenue and Profit Margin: Revenue for Q3 2024 reached IDR 30.6 trillion, a 7% increase from the previous quarter but down 2% year-over-year. HMSP’s net profit margin expanded to 6.2% in Q3 from 3.7% in Q2.

Market Share and Competition: HMSP held a market share of 27.6% as of 9M24. However, increased competition from Tier II and III cigarette manufacturers, particularly with aggressive marketing of new brands in the General Trade (GT) market, presents ongoing challenges.
Sales Volume: HMSP’s sales volume for Q3 2024 rose by 4%, although it slightly lagged the industry’s 5% growth rate.

Dividend Payout: HMSP is committed to a high dividend payout ratio, targeting a 100% payout for FY24 with an anticipated yield of 9%.
Profitability Forecast: HMSP’s expected profit margins indicate a modest increase over the coming years. This is supported by efficient operational practices, with cost reductions in salaries and overhead, even amid higher raw material expenses.

Product Shifts: HMSP continues to see demand in hand-rolled cigarettes (SKT) driven by consumer down-trading, as SKT products benefit from a lower excise tax (12% less) compared to machine-rolled cigarettes (SKM).
Brand Positioning: HMSP’s product portfolio is popular, especially the Mild series within the SKM segment. Despite pricing adjustments for market share conservation, the brand is positioned as a premium option.

Environmental Goals: HMSP aims for carbon neutrality in all production facilities by 2025, with water conservation efforts at facilities in Sukorejo and Karawang. Both locations have received high environmental ratings (Green and Blue) under Indonesia’s PROPER standards.
Social Impact: HMSP focuses on responsible tobacco farming and fair workplace conditions, with initiatives to eliminate child labor in its supply chain by 2025. Approximately 65% of HMSP’s workforce is female, with active training programs and health and safety protocols.
Governance and Corporate Structure: HMSP’s Board of Directors (BoD) includes six members, three of whom are female, while the Board of Commissioners (BoC) comprises four male members. Governance practices include internal audits and an independent audit committee.

Valuation Metrics: HMSP trades at a forward P/E of 11.4x for FY24E, with an expected increase in return on average assets (ROAA) from 12.5% in FY24E to 15.9% by FY26E.
Risks to Outlook: Key downside risks include further reductions in sales volume, profit margins, and potential regulatory pressures from excise tax hikes. Additionally, health awareness trends may impact cigarette demand in the long term.

All information is sourced from the Maybank report dated October 30, 2024.

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