Hold, 17% upside

2nd August 2022

Price Rp 920

Target price Rp 1075

Investment Consideration

Single digit sales growth

• Domestic cigarettes sales grew by 6.2% YoY in 1H2022 to 152 billion units. For 2Q2022, sales were up by 6.6% YoY to 76.8 billion units. HMSP sales volume in 2Q2022 reached 21.4 billion units, up by +6.2% YoY with market share stable at 27.8%. For 1H2022, sales volume increased +5.7% YoY to 42.3 billion units.
• In 2Q2022 HMSP’s sales increased +13.6% YoY or +4.5% QQ to IDR 27.34 trillion from the higher sales volume. For 1H2022, sales reached IDR 53.5 trillion up by 12.3% YoY.
• HMSP’s hand-rolled white cigarettes (SPT) had the fastest growth of +62.5% YoY to IDR 166.4 billion, while the biggest contributor to sales is still the machine-made clove cigarettes (SKM) with a 67% contribution worth IDR 18.3 trillion, up +13.3% YoY or +5.7% QoQ in 2Q2022.
• Hand-rolled Kretek (SKT) sales grew +16.9% YoY to IDR 6.12 trillion, while Machine-Made White (SPM) cigarettes decreased slightly -2.3% to IDR 2.3 trillion.
• With higher prices and higher sales volume, we expect better growth in2022F inline with a recovery in domestic consumption.

2Q2022 Results: Margins resume decline

• Despite higher sales volume in 2Q2022, HMSP’s margins declined after an increase in 1Q2022.
• HMSP NPM was 4.1% in 2Q2022, down from 7.3% in the 1Q2022. Net profit decreased by -41% Q0Q or -26.8% YoY to IDR 1.12 trillion.
• Cost of sales were up by +23% YoY to IDR 23.6 trillion in 2Q2022, boosted by higher raw materials (+10% YoY) and excise tax (+29% YoY). This resulted in a lower gross profit -2% YoY or – 12.7% QoQ to IDR 3.7 trillion with a lower gross profit margin of 13.6% in 2Q2022 from 16.3% in 1Q2022.
• Profit before tax decreased by -39.5% QoQ or -23.46% YoY to IDR 1.5 trillion.
• Because of the lower-than-expected 2Q2022 results, we revise down our forecast for HMSP’s bottom line but maintain HMSP’s top line 2022 forecast. We expect HMSP’s sales will grow +12% YoY to reach IDR 110.7 trillion in 2022F with lower bottom line growth of -8% YoY to give a net profit of IDR 6.5 trillion.

Valuation: TP 1,075 HOLD

• We are targeting HMSP to trade at a 17x 2023F PE within a year. Target Price is ID 1,075 which represents 17% upside. We maintain our recommendation to HOLD.