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Buy, 35% upside

8th May 2023

Price Rp 1015

Target price Rp 1375

Investment Consideration

Lower volume with higher market share

• HMSP sales volume declined in 1Q2023 by -5.7% YoY to 19.7 billion sticks in line with lower domestic cigarettes sales volume, -6.5%.  Lower cigarettes sales volume is due to higher prices of cigarettes in line with higher excise tax.
• Despite lower sales volume, HMSP market share still expanded from 28.3% to 28.5% in 1Q2023 in line with lower domestic sales volume.
• Despite the lower volume, HMSP’s sales increased +3.1% YoY but slightly declined -3% QoQ to IDR 26.9 trillion.
• HMSP’s hand-rolled white cigarettes (SPT) maintained the fastest growth of +36.5% YoY to IDR 260.7 billion, followed by the hand-rolled clove cigarettes (SKT) with +19.6% YoY growth to IDR 7.27 trillion.
• Machine-made clove (SKM) sales declined -1.9% YoY or -2.8% QoQ to IDR 17 trillion, while Machine-Made White (SPM) cigarettes declined by -12.3% YoY or -11% QoQ to IDR 2.01 trillion.

1Q2023 Results: Margins continue to improved

• HMSP recorded a higher NPM of 8% in 1Q2023, an increase from 4Q2022’s 5.1% and 7.3% in 1Q2022, from higher prices. Net profit continued  to increase at a double digit rate to IDR 2.16 trillion, +52.% QoQ or +12.8% YoY.
• In line with higher sales, cost of sales were slightly up by +1% YoY but declined -4.5% QoQ to IDR 22.1 trillion in 1Q2022. In detail, raw material costs increased +10.7% YoY and excise tax +1.2% YoY, the increases are at a slower rate  compared to before. Gross profit had faster growth of +14% YoY or +4.4% QoQ to IDR 4.85 trillion with an improvement in the gross profit margin to 18% in 1Q2023 from 16.3% in 1Q2022.
• Operating profit also increased +10.3% YoY to IDR 2.65 trillion, resulting in a higher OPM of 9.8% in 1Q2023.
• With more stable costs and a higher ASP, we expect HMSP’s sales will grow +10% YoY to reach IDR 121 trillion in 2023F with a bottom line profit of IDR 8.3 trillion.

Valuation: TP 1,375 BUY

• With an improved performance from HMSP, we upgrade our recommendation to BUY from HOLD. We are targeting HMSP to trade at a 17x 2024F PE within a year. Target Price is ID 1,375 which represents 35% upside.