Buy, 42% upside

19th October 2023

Price Rp 845

Target price Rp 1200

Investment Consideration

Maintaining growth in market share

• HMSP’s sales volume continued to decline in 2Q2023 by -2.8% YoY to 20.8 billion sticks, in line with lower domestic cigarette sales volume, which dropped by -4.8%. For 1H2023, HMSP’s sales volume still declined -4.3% YoY to 40.5 billion sticks, while domestic sales volume also decreased by -5.6%. The lower cigarette sales volume is due to higher prices of cigarettes in response to higher excise taxes, while consumers keep downgrading to lower-priced cigarettes.
• Despite the lower sales volume, HMSP’s market share expanded from 28.3% to 28.7% in 1H2023 due to the price hike being lower compared to competitors.
• As the cigarette prices were raised early in the year, HMSP’s sales increased by +6.7% YoY or +8.2% QoQ to IDR 29.18 trillion.
• HMSP’s hand-rolled white cigarettes (SPT) maintained the fastest growth at +41.4% YoY to IDR 235 billion, followed by the hand-rolled clove cigarettes (SKT) with +32.5% YoY growth to IDR 8.11 trillion.
• Machine-made clove (SKM) sales remained stable YoY but increased by +7.8% QoQ to IDR 18.33 trillion, while Machine-Made White (SPM) cigarettes declined by -9.5% YoY to IDR 2.09 trillion.

2Q2023 Results: Better YoY performance

• HMSP recorded a net profit margin (NPM) of 5.4% in 2Q2023, which contracted from 8% in 1Q2023 but increased from 4.1% in 2Q2022 due to a price hike in 1Q2023, while volume continued to decline in 2Q2023. Net profit increased by +40% YoY but declined by -26.4% QoQ to IDR 1.59 trillion.
• In line with higher sales, the cost of sales slightly increased by +5% YoY or +12.2% QoQ to IDR 24.8 trillion in 2Q2022. This increase was due to higher raw material costs by +8.5% YoY, while excise tax costs decreased by -10.8% YoY.
• As a result, gross profit decreased by -9.7% QoQ but still grew by +17.9% YoY to IDR 4.38 trillion, with the gross profit margin improving to 15% in 2Q2023 from 13.6% in 2Q2022.
• Operating profit also decreased by -34.6% QoQ but increased by +21% YoY to IDR 1.73 trillion, resulting in a higher operating profit margin (OPM) of 5.9% in 2Q2023.
• We expect better demand in 2H2023 as the election period will likely boost consumption. We expect HMSP’s sales to grow by a single digit, +4% YoY, reaching IDR 116 trillion in 2023 with a bottom-line profit of IDR 7.24 trillion.

Valuation: TP 1,200 BUY

• We are targeting HMSP to trade at a 17x 2024F PE within a year. The target price is IDR 1,200, which represents 42% upside. We maintain our recommendation to BUY.