Gudang Garam: An In-Depth Analysis

Date of Report: December 4, 2024

Broker Name: PT Maybank Sekuritas Indonesia

Introduction

In this comprehensive analysis, we delve into the intricacies of Gudang Garam (GGRM IJ), a prominent player in Indonesia’s cigarette manufacturing industry. The report, prepared by PT Maybank Sekuritas Indonesia on December 4, 2024, provides a thorough examination of Gudang Garam’s market position, financial metrics, ESG ratings, and strategic initiatives. This article aims to present the findings in an engaging manner, suitable for online financial audiences.

Company Overview

Gudang Garam holds a significant 23% share of the cigarette market in Indonesia, emphasizing long-term business sustainability through customer loyalty and strategic pricing. Despite the challenges of slow market expansion, Gudang Garam’s unique clove cigarette blends offer a distinct product differentiation that cultivates customer following.

Financial Performance

Gudang Garam’s financial metrics reveal a challenging landscape. The company expects a 78% decline in FY24 earnings due to a 31% average price hike and a 29.2% volume decline. Although the balance sheet remains strong, the looming threat of higher excise taxes and capital expenditures may pose challenges.

ESG Considerations

The report highlights Gudang Garam’s substantial ESG improvement scope. Its current ESG score stands at 13, significantly below the MIBG average of 50. The company has yet to expand into smoke-free products, unlike its competitors HMSP (IQOS) and Bentoel Internasional Investama (Velo). The company is urged to set clear ESG targets, particularly in achieving net zero carbon by FY50 and increasing renewable energy usage.

Community Contributions

Despite lacking a dedicated ESG committee, Gudang Garam contributes to its community through various initiatives, such as providing health and safety equipment during the pandemic, separating waste for recycling, and supporting vocational schools through its “Link & Match” program. The construction of Dhoho Airport in Kediri further exemplifies its commitment to community development.

Market Challenges and Opportunities

Gudang Garam faces significant market challenges, including rising health awareness and government policies aimed at reducing smoking. These factors increase regulatory risks and could potentially impact investor appetite. However, opportunities exist in the form of new product traction, favorable raw material prices, and potential industry consolidation due to advertising and promotion restrictions.

Pricing and Stock Performance

Gudang Garam’s historical pricing trends have been influenced by various factors, such as volume outperformance in FY18, government excise tax plans, and the decision not to pay dividends for FY19 profits. The company gained positive sentiment following the government’s FY23-24E excise tax structure announcement, allowing for strategic price planning.

ESG Ratings and Strategies

Gudang Garam’s ESG strategies focus on improving wastewater and air pollution controls, waste management, and utilizing renewable resources like biomass. The Board of Commissioners and Directors play a crucial role in overseeing these initiatives, although familial ties and low remuneration raise concerns about corporate governance practices.

Conclusion

Gudang Garam’s journey is marked by both challenges and opportunities. While facing pressure from government regulations and health awareness, the company remains a key player in Indonesia’s cigarette market. Its financial resilience, coupled with strategic community contributions and potential product innovations, positions it for future growth. Investors and stakeholders are encouraged to monitor Gudang Garam’s progress in enhancing its ESG framework and setting clear long-term targets.