Cigarette maker Gudang Garam (GGRM) was a US$13 billion company in March 2019, but has since lost ground to as low as Rp25,750 today to make a market capitalization of Rp50 trillion (US$3.3 billion) only. Losing nearly US$10 billion of market value in two years clearly hurts, especially looking back at interest from global tobacco players years ago.

GGRM was target of acquisition rumors for many years. Susilo Wonowidjojo, one of the GGRM family members, did sell his own cigarette company to Japan Tobacco for US$677 million five years ago. There were rumors about possible acquisition of GGRM itself by Japan Tobacco until last year, but that yet to happen. 

At the last quoted price, of course, Wonowidjojo family might not in a position to sell the company. Not to mention weaker results in the past two years. The company reported a significant drop in its bottom line for the first half (H1) of 2022, due to higher costs. It booked net profit of Rp956 billion in said period, dropped 59% year on year (y/y) as cost of sales rose 3.7% y/y to Rp56.5 trillion and operating expenses increased 8.9% y/y to Rp3.89 trillion. Operating profit fell 54% y/y to Rp1.39 trillion.

Revenue also grew only by 1.7% y/y to Rp61.67 trillion. The purchasing power has not fully recovered after pressured by the economic slowdown and the impact of COVID-19 pandemic. 

Earlier HM Sampoerna, the largest cigarette producer in Indonesia, reported it booked net profit attributable to owners of Rp3.05 trillion in H1 of 2022, declined 26% y/y, also due to higher costs. Revenues grew 12.4% y/y to Rp98.9 trillion, while the cost of goods sold rose 18.4% y/y to Rp45.5 trillion.

GGRM’s cashflow balance sheet weakened significantly. It generated net cash of Rp5.37 trillion from operating activity during H1 this year, lower than Rp10 trillion it generated in H1 last year.

GGRM paid income tax of Rp974.6 billion in H1 of 2022, higher than Rp690.5 billion it paid in H1 of 2021. HMSP paid an income tax of Rp939.4 billion in H1 this year, lower than Rp1.14 trillion it paid in H1 last year. HMSP paid an excise tax of Rp42.89 trillion in said period, higher than Rp31.15 trillion it paid in H1 last year.

GGRM spent Rp2.3 trillion on acquiring fixed assets, and it used net cash of Rp2.2 trillion on financing activities, reducing its cash and cash equivalent to Rp3.77 trillion from previous Rp4.76 trillion.

Considering the economy has not fully recovered, and the impact of the pandemic is continuous, the Government needs to protect the labor-intensive segment, not to increase tax on hand-made cigarettes (SKT) in 2022. Instead, a moderate increase in excise tax will support the sustainability in the industry and provide room to recover after the pandemic.

The Government also needs to reinstate the multiyear excise policy roadmap, which would create a more predictable environment and, in that way, help attracting more investments. The Government has raised the cigarette tax rate by 12% this year. Weak purchasing power led to weak earnings for cigarette makers. So, cigarette makers raised their prices to maintain their margins.

For hand-rolled cigarettes (SKT), produced through labor-intensive processes, the Government caps the hike at 4.5%. This hike aims to increase state revenue and decrease smoking, especially among children. The cigarette excise tax is set to contribute Rp193 trillion to state revenue in 2022.

That said, production of cigarettes in 2022 would decline from 320 billion sticks to 310 billion. HMSP nad GGRM are said to have anticipated the cigarette excise tariff in 2022. The price index for cigarettes also rose to 13.77% this year from 12.7% last year, with the target that state budget revenues from cigarette excise reach Rp193.5 trillion.

With the fall of profitability of cigarette business, GGRM expect to generate more from new businesses, including infrastructure (toll roads and airports) and properties. We know Susilo Wonowidjojo has grown MAKIN, one of the largest holders of oil palm plantation concession in the country. 

by Yohannes Obor

DISCLAIMER: NO POSITION IN STOCKS MENTIONED IN THIS ARTICLE